Producer prices rise 0.2%, but signs still point to lower inflation in Fed’s key gauge

Despite the producer price index coming in stronger than expected on Friday, the Federal Reserve’s most important measure of inflation, the personal consumption expenditures index, should remain near zero in June when it is released on July 26.

Our estimate of a 0.01% gain in the PCE index would mark the second flat month in a row and would be the best two-month stretch since November. As a result, the 12-month PCE inflation headline number should fall to 2.4%, the lowest since 2021.

At the same time, core PCE inflation, which excludes the more volatile food and energy components, will most likely increase by only 0.1% on the month and by 2.46% on a year-ago basis, according to our estimates.

With a chance of easing inflation on both estimates, the new data would bolster the probability that the Fed will cut its policy rate in September, while potentially stimulating more talk about the possibility of a cut in July.

The producer price index rose by 0.2% on the month, exceeding consensus estimates of 0.1% and countering the recent easing in the consumer price index. But the PPI report does not include shelter, whose long-awaited decline finally showed up in June in the CPI.

Based on our analysis, we have just seen the beginning of a sharp cooldown in the housing inflation component, which lags real-time rent prices by 12 to 18 months. There is no reason for the Fed to keep interest rates at their current elevated level, which is too restrictive in our opinion.

This article was written by Tuan Nguyen and originally appeared on 2024-07-12. Reprinted with permission from RSM US LLP.
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