The producer price index grew 0.1% in August, while the core rate — which excludes food and energy — rose 0.3% in the month, the Labor Department reported Wednesday.
The numbers will allow the Federal Reserve to cut interest rates 25 basis points at their Sept. 17-18 meeting, should they choose to.
Markets have priced in a September rate cut and are expecting more easing in the future, with many market watchers expecting the Fed to eventually cut rates as low as 1% from the current 2% to 2.25% range.
“The Treasury curve remains inverted, with short-term bond yields above long-term bond yields,” said Bill Merz, director of fixed income at U.S. Bank Wealth Management. "This relatively rare phenomenon signals investors expect multiple rate cuts from the Fed soon and is coinciding with slowing growth and inflation in the United States. Inverted curves have historically foreshadowed recessions, although they are a poor tool for timing asset price changes.”
In July, PPI was up 0.2% while the core rate dropped 0.1%.
Economists polled by IFR Markets expected a 0.1% gain in PPI and 0.2% at the core.
Year-over-year PPI increased 1.8%, with a 2.3% gain in the core rate.
“Despite the pick-up in producer price inflation, we still expect the Fed to cut the fed funds rate by a quarter point next week,” according to Scott Anderson, chief economist at Bank of the West. Although the cost of services grew 0.3%, goods prices fell 0.5%, spurred by a 2.5% drop in energy prices.
Wholesale trade
Wholesale inventories rose 0.2% in July, while sales rose 0.3%, the Commerce Department reported Wednesday.
Economists expected the 0.2% increase in inventories, but were looking for a 0.4% rise in sales.
The inventory to sales ratio held at 1.36 in July, up from 1.27 a year ago.
Small business optimism
Small business owners were less optimistic in August, although still the level remains near historic highs.
The National Federation of Independent Business Small Business Optimism Index, released Tuesday, fell 103.1 from 104.7 a month earlier. The index declined as “fewer owners said they expect better business conditions and real sales volumes in the coming months. Job creation accelerated, positive earnings trends improved, and quarter-on-quarter sales gains remained strong,” according to the report.
“In spite of the success we continue to see on Main Street, the manic predictions of recession are having a psychological effect and creating uncertainty for small business owners throughout the country,” according to NFIB President and CEO Juanita D. Duggan. “Small business owners continue to invest, grow, and hire at historically high levels, and we see no indication of a coming recession.”
“The August report does not show a sign of inflation or reflect what the Fed has noted,” NFIB Chief Economist William Dunkelberg said. “The pessimism we’re seeing is contagious, even though the actual economy is thriving. Expectations can be infected and, as a result, could turn sour. All the talk about an impending recession can create a false reality, but it doesn’t make it right. Main Street is continuing to produce and remains strong in spite of the headlines.”
