U.S. August PPI unexpectedly cools significantly, is a 50 basis point Fed rate cut possible?

The U.S. Bureau of Labor Statistics (BLS) released its Producer Price Index (PPI) report for August on Wednesday, showing that wholesale inflationary pressures are easing, reducing the likelihood of a significant rise in consumer prices in the coming months.

The U.S. August PPI year-on-year came in at 2.6%, the lowest since June and well below the expected 3.3%. The previous value was revised down from 3.3% to 3.1%. The month-on-month figure was -0.1%, marking the first decline in four months, lower than the expected 0.3%, with the previous value revised down from 0.9% to 0.7%.

The U.S. Dollar Index dropped 26 points in the short term, reaching a low of 97.6. Spot gold rose $8 in the short term before pulling back. Non-U.S. currencies generally strengthened, with EUR/USD rising over 30 points in the short term, reaching a high of 1.1729. USD/JPY dropped 40 points in the short term, reaching a low of 147.11. U.S. stock index futures rose in the short term, with S&P 500 index futures up 0.44%.

Short-term U.S. interest rate futures rose after the PPI data was released, with traders increasing their bets on a Federal Reserve rate cut. U.S. Treasury bonds rebounded collectively: the yield on the 10-year U.S. Treasury fell by 0.6 basis points to 4.068%. The yield on the 2-year U.S. Treasury fell by 1.1 basis points to 3.531%. The yield on the 30-year U.S. Treasury rose by 0.5 basis points to 4.722%.

Although Trump's tariff policies have increased corporate costs, companies still avoided significant price hikes last month. This PPI pullback came after a sharp rise in July, as many companies feared that substantial price increases could scare off customers amid ongoing economic uncertainty affecting consumer decisions.

The latest PPI data adds another layer of complexity to the Federal Reserve's policy debate. Investors are already convinced that the Fed will cut rates next week, but the extent of the cut remains in question. The market generally expects a 25 basis point cut, but weak employment data has revived the possibility of a larger 50 basis point cut.

Adam Button, an analyst at U.S. financial website investinglive, noted that the Consumer Price Index (CPI) report will be released tomorrow. The PPI data is a strong signal that the CPI data may come in below expectations. If the CPI result is lower than expected—especially if it is significantly lower—then the likelihood of a 50 basis point rate cut by the Fed will increase. He specifically pointed out that the month-on-month decline in PPI excluding food and energy has reached the largest drop in the past 10 years.

The extent to which companies pass on tariff burdens to consumers will be a key factor influencing interest rate trends this year. Although Federal Reserve officials generally expect that import tariffs will push up inflation for the remainder of 2025, they have not yet determined whether this is a one-time adjustment or a more lasting impact.

The CPI data scheduled for release on Thursday will provide insights into the extent to which tariffs in August affected U.S. consumers. Forecasters expect the core CPI, excluding food and energy, to rise again month-on-month.

For economists, the importance of the PPI report also lies in the fact that some of its components are used to calculate the Fed's preferred inflation gauge—the Personal Consumption Expenditures Price Index (PCE). These related categories were mixed in August: portfolio management services and airline ticket prices continued to rise steadily, while various indicators for healthcare services were more moderate.