What does PPI say about the Fed’s next rate cut?

The producer price index (PPI) remained stable month-on-month and was weaker than expected, although the inflation indicator posted stronger-than-expected increases year-on-year. Wolfe Research Chief Economist Stephanie Roth joins Seana Smith and Brad Smith in Morning Brief to discuss the latest economic data and what signals the Federal Reserve’s next move in the current rate-cutting cycle.

“Today’s data was fine. “On the sidelines, it was actually a little more restrictive than at least the headline suggests,” says Roth, explaining that she focuses on what the PPI data says about the personal consumption expenditures (PCE) price index, which tends to carry more weight for the Fed.

“What really matters for the PPI are the components that feed into the all-important core PCE index that the Fed is targeting. So today’s data was actually slightly better for some of the key components that go into this PCE index. So things like household contents insurance, care, hospitals. So for these, it actually takes our core PCE estimate. Shortly before that [PPI] Pressure, we were looking for about 0.25% on core PCE. Now it looks like it could get a little hotter, which is higher than what the Fed expects.”

She says: “If you take a step back, we think the Fed is in a position to cancel the next meeting, but it’s a mistake and maybe a little higher than what the market is currently expecting.”

“Interest rates are still high compared to neutral [the Fed] “It should definitely be shortened,” Roth says, noting, “Could they have skipped a meeting in November? Naturally. But it probably looks a little strange to go to 50 basis points and then skip a meeting, but they definitely could.”

She added: “I do think we will have some containers in stock. Maybe not this year, but maybe early next year.”

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This post was written by Naomi Buchanan.