New York, Aug. 16 (Bloomberg/Reuters-style) – U.S. stocks came under pressure Friday after a hotter-than-expected inflation report rattled investor confidence and cast doubt on the Federal Reserve’s ability to cut rates as soon as September.
The July Producer Price Index (PPI), which tracks wholesale goods prices, surged 0.9% from June — the sharpest monthly increase since June 2022 — far above the 0.2% rise forecast by economists, according to the Bureau of Labor Statistics. On a year-over-year basis, headline PPI rose 3.3%, while core PPI (excluding food, energy and trade) climbed 2.8%, its largest gain in more than two years.
The data reignited fears that rising costs at the factory level could soon spill over into consumer inflation, undermining expectations for multiple Fed rate cuts this year.
“July PPI explodes to the upside, leaving Powell in a bind and expected rate cuts in question,” said Stephen Guilfoyle, analyst at TheStreet Pro. “This was a rude awakening for anyone betting on aggressive easing.”
Fed Rate Cut Bets in Jeopardy
Markets had rallied in recent months on optimism that slowing jobs growth and easing trade tensions would give the Fed cover to start cutting rates in September. The S&P 500 has climbed 28% since April’s tariff pause, pushing its price-to-earnings ratio above 22, a level last seen before February’s tariff-driven selloff.
But the PPI shock complicates that narrative. The CME FedWatch Tool still shows investors pricing in rate cuts in September and October, but the probability of a third cut in December has fallen sharply, with futures markets now pushing expectations out to April 2025.
“The Fed now has all the ammo it needs to stay cautious,” Guilfoyle added. “Powell suddenly looks a lot less foolish than many thought.”
What’s at Stake
Higher producer prices could squeeze corporate profit margins and dampen consumer demand if costs are passed on. That raises questions about whether the equity rally — already seen as “priced for perfection” — can be sustained without a clear path to lower interest rates.
While the S&P 500 has historically delivered 10% annual returns on average since the 1950s, stretched valuations and sticky inflation could weigh on gains if GDP and earnings growth falter.
For now, investors are bracing for the August inflation print in early September, which could prove decisive for the Fed’s Sept. 17 policy meeting.
