PPI inflation shock rocks Wall Street and Trump — big Fed rate cut dreams go up in smoke

Economic Times

9 hours ago

The latest PPI data shows a sharp 0.9% jump, the fastest since May 2022, with core prices climbing 0.6%. Even as jobless claims eased slightly, investors are rethinking bets on a big September rate cut.
Synopsis July PPI report jolts markets — big Fed rate cut dreams fade: Wholesale prices jumped 0.9% last month, the fastest since May 2022, while core PPI rose 0.6%, signaling persistent inflation. Jobless claims eased slightly to 224,000, but investors are cautious as hopes for a large September rate cut slip away. U.S. wholesale prices surged in July, with the Producer Price Index (PPI) climbing 0.9%, marking the fastest monthly increase since May 2022. Rising costs for food and services drove much of the increase, signaling that inflationary pressures remain persistent. Core PPI, which strips out volatile food and energy costs, rose 0.6%, highlighting underlying price growth that could influence Federal Reserve decisions in the coming months.
ADVERTISEMENT At the same time, jobless claims eased slightly to 224,000 from 227,000 the previous week, showing that the labor market remains relatively strong but may be starting to soften. This combination of higher wholesale prices and easing employment signals a delicate balancing act for the Fed: controlling inflation without slowing the economy too abruptly.
Investors reacted cautiously to the data. S&P 500 futures fell 0.3% as traders digested the potential implications for interest rate policy. Market expectations for a 25-basis-point rate cut in September remain high but have moderated slightly, while hopes for a larger 50-basis-point reduction have diminished.
ALSO READ: Ethereum surges 16% to $4,783 in 5 days — is a $5K breakout now inevitable as analysts eye $15K by year-end? For everyday Americans, rising wholesale prices often translate into higher costs for goods and services, from groceries to household essentials. Businesses are also adjusting, with manufacturers and suppliers already recalibrating contracts to hedge against continuing price pressures. Monthly change: +0.9% (largest monthly rise since May 2022)
+0.9% (largest monthly rise since May 2022) Annual change: +3.3% (up from 2.4% in June)
+3.3% (up from 2.4% in June) Goods prices: +0.7% (food, durable goods lead increase)
+0.7% (food, durable goods lead increase) Services prices: +1.1% (largest contributor to overall rise)
ADVERTISEMENT Wholesale prices surged in July, with the Producer Price Index (PPI) climbing 0.9% month-over-month — the largest increase since May 2022. Goods prices rose 0.7%, led by food and durable goods, while services jumped 1.1%. On an annual basis, PPI inflation accelerated to 3.3% from June's 2.4%, surpassing most economists' forecasts.
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ADVERTISEMENT Excluding volatile food and energy costs, core PPI jumped 0.6% in July, marking its steepest monthly rise in three and a half years. The annualized core rate now sits at 2.8%. For context, this core reading is critical because it reflects underlying inflation trends that most directly influence Federal Reserve policy. Monthly change: +0.6% (largest monthly gain in 3.5 years)
+0.6% (largest monthly gain in 3.5 years) Annual change: +2.8%
Wholesale price inflation often filters down to retail prices, impacting everything from groceries to housing costs. Companies facing higher input costs may pass them to consumers, fueling further price pressures. For households, even moderate increases in the PPI can translate to noticeable jumps in daily spending, particularly in food and energy.
ADVERTISEMENT First-hand insights from industry sources indicate that manufacturers in the Midwest are already recalibrating supply contracts to hedge against rising costs. One executive in Chicago's food processing sector noted, 'We're seeing supplier prices move faster than our forecasts. Some of that will inevitably hit store shelves by early fall.' Contrasting with inflation pressures, initial unemployment claims dropped slightly to 224,000 from 227,000 the previous week. This subtle decline signals a modest softening in the labor market — not a major downturn, but enough to hint that employers may be pausing aggressive hiring.
ADVERTISEMENT Historically, a stable or slightly easing job market can balance inflationary pressures, giving the Fed more flexibility to moderate policy without derailing growth. Analysts caution, however, that persistent inflation in goods and services could still force a more cautious stance. Initial claims: 224,000 (down from 227,000 previous week)
224,000 (down from 227,000 previous week) Implication: Slight labor market softening; not a major downturn
Following the PPI release, S&P 500 futures dipped roughly 0.3%, reflecting investor concerns over rising costs and potential Fed interventions. Markets are still pricing in a 94.5% probability of at least a 25-basis-point rate cut in September, slightly down from 100% before the data. Expectations for a larger 50-basis-point cut have softened, showing that traders are weighing inflation data heavily in their Fed bets. Major tech stocks, historically sensitive to interest rate moves, also felt pressure. Analysts note that even a moderate slowdown in anticipated rate cuts could affect valuations for high-growth firms. S&P 500 futures: Fell by 0.3% after the PPI release
Fell by 0.3% after the PPI release Fed rate expectations: Probability of 25-basis-point cut in September: 94.5% (down from 100% pre-data) Probability of 50-basis-point cut: Lower than prior expectations
The Fed faces a delicate balancing act: strong inflation signals suggest caution, while a gradually cooling labor market argues for support. In practice, policymakers will likely emphasize data dependency, monitoring upcoming reports such as the August Consumer Price Index (CPI) and retail sales before making decisions. Fed watchers highlight that core PPI, which strips out volatile items, is particularly influential. If these underlying trends remain elevated, the Fed may need to reassess the magnitude of the September rate cut, potentially delaying or reducing it. For investors, rising wholesale costs may shift portfolios toward inflation-resistant sectors, such as commodities, utilities, or dividend-paying stocks. Bonds could also see volatility if market expectations for Fed moves continue to adjust. Consumers should anticipate incremental price increases in essential goods, particularly food and energy. Budget planning for households may need to account for a 3–5% rise in certain goods over the next few months, depending on supply chain adjustments. July's PPI and jobless claims provide a snapshot of the economic balancing act facing the U.S.: inflation pressures remain, but the labor market shows signs of moderation. The next few weeks of economic data will be crucial in shaping the Fed's September policy and market sentiment. Investors, businesses, and households alike are advised to watch for signals from upcoming CPI readings, retail sales reports, and corporate earnings updates.
Q1: What caused U.S. wholesale inflation to rise in July? July's PPI jump was driven by higher food and service costs, pushing inflation above expectations.
Q2: How did jobless claims affect market outlook in July? Falling jobless claims signaled slight labor market easing, influencing S&P 500 futures and Fed rate expectations.
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