U.S. producer prices unexpectedly fall by 0.1% in August

Investing.com - U.S. factory-gate prices unexpectedly fell in August, pointing to easier-than-anticipated inflationary pressures that could bolster the case for the Federal Reserve to slash interest rates at its upcoming policy gathering.

The producer price index for final demand decreased by 0.1% last month, according to data from the Bureau of Labor Statistics on Wednesday. Economists had anticipated that the month-on-month figure would climb by 0.3% in August, following a downwardly-revised rise of 0.7% in July.

Services were a major source of disinflation in August. The index for final demand services declined 0.2%, the largest such dip since April, and helped offset a 0.1% increase in the goods prices.

Prices in categories like apparel, textiles, household furniture and motor vehicles -- which are viewed as more exposed to sweeping U.S. tariffs -- were also "fairly muted," analysts at Vital Knowledge said.

Investors keep close tabs on the PPI gauge because a section of the data is used to determine a metric of inflation that is preferred by the Fed.

Economists are now likely to calculate how the PPI result will play into the August reading of the personal consumption expenditures price index, due out on September 26. However, these figures will come out after the Fed has unveiled its latest interest rate decision next week.

The PPI data comes ahead of a separate gauge of consumer price growth that is set to be published on Thursday. Further indications of easing inflation may assuage some recent worries that elevated tariffs could threaten both sides of the Fed’s dual mandate: promoting maximum employment and ensuring price stability.

"There is little for the Fed to worry about in terms of the PPI components that feed into the core PCE deflator, which were on the whole in line with their averages in recent months," said Stephen Brown, Deputy Chief North America Economist at Capital Economics, in a note. Brown noted that the downside surprise to the PPI suggests that "tariff effects are feeding through only slowly."

Expectations for a Fed rate cut of at least 25 basis points have been all but cemented, with policymakers seen prioritizing a reduction to help bolster a possibly cooling labor market. There is also a roughly 10% chance of a deeper, half-point drawdown from the current level of 4.25% to 4.5%, CME’s FedWatch Tool has shown.

S&P and Nasdaq futures contracts pointed higher after the PPI release, while the rate-sensitive 2-year Treasury yield and its benchmark 10-year counterpart both dropped. Yields tend to move inversely to prices.

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