PPI Is the Data Point That Matters Most This Week
The two big releases this week are PPI (Producer Price Index) and CPI (Consumer Price Index). The bar for the next rate hike this year is very low. If PPI or CPI comes in high this week, the Fed will step over that bar and probably hike in 2026.
CPI comes out Friday and gets most of the attention, but PPI deserves more focus. PPI feeds into PCE (Personal Consumption Expenditures), and PCE is the gauge the Fed watches. The components inside PPI map directly over to core PCE, so PPI gives the clearest early signal for what CPI, and then PCE, will look like for the month. Most of the market's view will form after the PPI release. A surprise to the upside on these reports could push both short-term and longer-term Treasury yields higher this week.
A Strong Jobs Report Clears the Path
The August jobs report was a strong beat, with upward revisions to the prior two months. That fixed some of the seasonal summer weakness and showed broad job growth over the past several months. Combined with hot inflation, that puts the Fed in a comfortable zone to hike in September, with the data behind them.
The labor market is not off the Fed's radar, but the report removed the worry that the Fed would be hiking into an economic slowdown. Right now there is no sign of a slowdown.
One or Two Hikes, Not a Hiking Cycle
The forecast is one or two rate hikes later this year or early next. This is not a rate-hiking cycle. If the Fed does start hiking, it likely will not be a long, drawn-out cycle. This distinction matters. The Fed has cut back on forward guidance, so no one can be certain it becomes a cycle.
History shows a split between slow and fast tightening cycles. A slow cycle means 25 basis point increases at some meetings, not every meeting - maybe a handful across a year. Slow cycles tend to support the equity market and the economy. Coincident economic indicators and the S&P 500 both hold up well through slow cycles, giving a healthy backdrop. That comes with volatility inside the stock market, including sharper declines early in a hiking cycle as the market digests the pivot to hikes.
The speed of hikes is what matters most, along with their size - the lesson from 2022. Right now the Fed does not appear to want to move that fast.
Why the Fed Has Held Off
Labor is not the Fed's main reason for possibly hiking, but it is a reason the Fed has not hiked yet. The labor market recovery has been uneven over the past year despite this year's resilience, and there are still supply constraints. The Fed has been hesitant to step in and risk disrupting that recovery. August showed labor still looks intact.
Wages Are Falling Behind Inflation
The jobs report showed nominal wages up 3.1%. With inflation expected at 3.4% to 4%, that leaves real wage growth around negative 29 to 30 basis points.
Two ways to read this. Adjusted for inflation, it is a negative for the consumer - weak pricing power and spending power. But most consumers think about wages in nominal terms and do not adjust for inflation when they get a paycheck. As long as they have income, they keep the spending engine growing month to month, which supports the nominal economy.
From the Fed's side, this is a benefit for inflation. Weak real wages mean no wage-price spiral, where stronger wage growth pushes stronger price growth. That dynamic could return in 2027 if inflation stays sticky and hiring holds up - at that point the wage-inflation component would come back. For now, unit labor cost data and average hourly earnings data still show no broad support for wage-driven inflation.
