Advisor inflation worries ease as latest PPI data comes in cold

The latest Producer Price Index (PPI) data came in colder than expected Wednesday, easing advisor worries about inflation, as well as, potentially, the likelihood of a hawkish Fed interest rate move anytime soon.

The index for final demand declined 0.3%, according to the Bureau of Labor Statistics, well below the forecast of an unchanged number from analysts surveyed by Dow Jones Newswires and the Wall Street Journal. The decline can be attributed to prices for final demand goods, which fell 1.4%, the Bureau of Labor Statistics said. In contrast, the index for final demand services moved up 0.2%.

PPI is an important indicator of inflation and the latest number comes hot on the heels of the latest Consumer Price Index data, which came in lower-than-expected Tuesday.

The latest PPI data also marks a stark contrast to recent months - final demand prices advanced 0.6% in May and 1.1% in April.

Impact of war in the Gulf

Inflation jumped earlier this year, fueled by the conflict between the U.S. and Iran and disruption to shipping in the Strait of Hormuz, as well as oil and gas production in the region.

“It appears that the 2026 inflation resumption crested last month and headed back to its pre-conflict trend lower,” said Jamie Cox, managing partner for Harris Financial Group. “This really helps the Fed avoid the mistake of hiking rates into a supply shock.”

Last month the Federal Reserve kept to its path of keeping its policy rate steady at 3.5% to 3.75% in its first meeting with new chair Kevin Warsh in the hotseat. The Fed made its last rate cut in December and Warsh’s predecessor Jerome Powell resisted pressure from President Donald Trump to cut rates.

Kevin Warsh testimony

Warsh vowed to deal with inflation during testimony before the House Financial Services Committee Tuesday. “The members of our [Federal Open Market] Committee have no tolerance for persistently elevated inflation,” he said. “And we share a resolute commitment to restoring price stability.”

Warsh also described high inflation as an “undue burden” on American households and businesses.

The latest inflation data bodes well for the inflation rate environment, according to Stephen Coltman, head of macro at ETF issuer 21shares. “Today’s data confirms the weaker than expected inflation trend from yesterday’s CPI,” he said, in a note Tuesday. “Barring an escalatory spiral in the Middle East, the Federal Reserve should be satisfied that current policy settings are sufficiently restrictive to get inflation gradually back towards the Committee’s target.”

The Fed’s long-term inflation target is 2%.

Bill Adams, chief U.S. economist at Fifth Third Commercial Bank said that, while PPI undershot consensus forecasts, it was in line with the bank’s below consensus view. ”Lower energy prices were the biggest factor in the report, but core inflation ran cool, too,” he said. “The Fed will likely see June’s cool CPI and PPI reports as justifying unchanged interest rates at their next decision late this month.”

The next FOMC meeting is on July 28 and 29. The CME’s FedWatch tool  puts the probability of rates being unchanged at 89.8% for that meeting.

Long-term interest rates outlook

While rates could stay the same over the coming months, that doesn’t mean that a rate hike will not materialize later this year. "We continue to expect a 25bps rate hike ahead as the next policy move with the baseline case for this in December," said David Doyle, head of economics at Macquarie Group, in a note Tuesday. The CME's FedWatch tool shows that with a current target rate range between 3.5% and 3.75%, the futures market is pricing in a 29.8% probability that this won’t change through the Fed’s December 2026 meeting. However, the probability of an increase to between 3.75% and 4% is 44.5%, and an increase of 4% to 4.25% has a probability of 21.6%.

For advisors, the client message is nuance, not comfort: near-term rate stability looks likely, but there is a very real possibility of a rate hike later this year. Advisors may want to hold off on repositioning fixed-income duration based on one or two soft inflation reports, watching the August and September CPI/PPI releases — and any renewed disruption in the Strait of Hormuz — before making moves. Conversations about short-duration Treasuries, or floating-rate exposure, which offer some cushion if the Fed does tighten again, could be valuable for clients.