One Surprise Inflation Number Could Change The Fed's Next Move

Core Insights - A significant drop in U.S. producer prices has increased expectations for Federal Reserve rate cuts, with a focus on the upcoming Consumer Price Index report [1][3] - Economists predict the August Consumer Price Index will show a year-over-year inflation increase to 2.9%, the highest since January 2025 [1] - The core inflation rate is expected to remain steady at 3.1%, indicating persistent underlying price pressures above the Fed's target [2] Producer Price Index (PPI) Analysis - The August Producer Price Index (PPI) fell by 0.1% month-over-month, contrary to expectations of a 0.3% increase, with the annual rate decreasing to 2.6% from forecasts of 3.3% [3][4] - Core PPI also declined by 0.1% monthly, with the annual rate dropping from 3.4% to 2.8% [3] Market Expectations - Market sentiment is leaning towards a 25 basis-point rate cut by the Federal Open Market Committee (FOMC) next week, with a 89.8% probability assigned to this outcome [4] - There is speculation that a more substantial 50 basis-point cut could be more effective, although this is not currently priced in [4] Consumer Price Index (CPI) Forecasts - Goldman Sachs forecasts a core inflation increase of 0.36% for August, slightly above the consensus of 0.3%, leading to a year-over-year core rate of 3.13% [5] - Used car prices are expected to rise by 1.2%, while new car prices may increase by 0.2% due to reduced dealer incentives [5] - Airfares are projected to surge by 3%, influenced by seasonal factors and increased travel activity [6] - Broad inflationary pressures are noted in categories such as household goods, apparel, and electronics due to tariffs [6]