Inflation Cooling
Good inflation data is stacking up. This marks two lower PPI readings in a row and two lower CPI readings in a row, with CPI reported yesterday.
Headline month-over-month PPI came in unchanged at 0.0, better than the 0.2 expected. A month ago it fell 0.3; this month it held flat. Year-over-year PPI dropped from 5.5% to 4.7%. Core rose 0.2, a tenth better than expected, and core year-over-year fell from 4.7% to 4.2%.
Inside the report: final demand services showed portfolio management prices up 6.5%. Truck transportation of freight fell 1.8%. Final demand goods dropped 0.7, led by a 5.7% drop in gasoline. Final demand energy fell 3.1%. Final demand foods fell 0.9, and final demand goods less food and energy rose a tenth. The data was again driven mostly by lower energy prices, with gasoline down 5.7%. The numbers point to lower inflation, which should shape the Fed's thinking.
One inflationary spot stood out in the PPI report: construction was elevated and cost more, likely tied to AI-related data center building. That element could add some inflation, but it is a small part.
Core CPI now sits at 2.5%, just half a percent above the Fed's 2% target.
Shifting Rate Hike Odds
The CME tool shows the odds of a September rate hike falling fast. Yesterday morning they stood at 43%. After CPI, they dropped to 38%. After this PPI, they sit at 32% - more than 10% lower than yesterday morning.
Further-out months eased too. October fell from 57% before the CPI and PPI to 48%. December dropped from almost 75% yesterday morning to 69%. January slipped from 78% to 74%. The December, January, and later readings will need more data before they come down further.
Rate hikes that were being built into the Fed's projections are now moving lower in probability and getting pushed back in time. The September reading has dropped to a third; the Fed will not raise rates if it sits at 30%. This sets up a good backdrop for stocks as inflation keeps coming down.
The Fed's Position
Kevin Warsh does not appear to favor higher interest rates. He may lower the Fed balance sheet, which is itself a tightening of policy, but on the Fed funds rate his focus is on consumers, small businesses, and housing. Housing numbers have been sloppy lately, and that likely stays his focus.
Warsh has had some lucky timing. When he first came on, oil fell substantially, so he did not have to weigh oil at 100. Now cooling inflation gives him another break, letting a wait-and-see stance look fine.
There is no August Fed meeting. Warsh speaks at Jackson Hole between August 27th and 29th, which should be a closely watched speech. More data will come before the September Fed meeting.
Jobs and a Hawkish Voice
Jobless claims came in at 209,000, up slightly from last week but still a strong sign for the labor market. Unemployment has moved from 4.3% to 4.1% over the last two months. First-time filers for unemployment insurance totaled 209,000, and the four-week average remains low. The labor market stays strong.
Beth Hammock said the labor market is stable, that action is needed now, and that too much growth could add pressure on prices. She was not a voter in 2025. She dissented as a voter in 2024 when rates were lowered, so she has been hawkish throughout, even during easing. With the Fed now holding, she remains more hawkish than most members.
