What flat PPI numbers tell advisors about the Fed's next move

Advisors watching for signs of pipeline inflation got some more reassurance Thursday: July Producer Price Index (PPI) data held flat, below the 0.2% increase economists expected, easing — for now — pressure on the Fed to tighten policy at its September meeting.

The index for final demand was unchanged in July, according to the Bureau of Labor Statistics, below the forecast of a 0.2% increase from analysts surveyed by Dow Jones Newswires and the Wall Street Journal. June PPI declined 0.1%, the BLS said Thursday, revised from an initial 0.3% decline.

A 0.2% increase in the index for final demand services and a 2.2% advance in prices for final demand construction offset a 0.7% decrease in the index for final demand goods, the Bureau of Labor Statistics said.

Core PPI rose 0.2%, just below economists’ forecast of 0.3%.

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 in line with expectations Wednesday.

Bill Adams, chief U.S. economist at Fifth Third Commercial Bank noted that PPI was flat in July, below expectations, on falling energy and food prices, while core PPI rose at a moderate pace. However, Adams noted that a component of core PPI that goes into the calculation of core PCE inflation rose sharply. “Even so, the July CPI and PPI reports collectively keep a narrow path open for the Fed to hold rates steady at the next decision in September,” he added.

In a note released Wednesday after the CPI data came out, Katie Klingensmith, chief investment strategist for Edelman Financial Engines, said that Fed would be watching PPI this week for pipeline inflation, essentially, price increases that have not yet reached consumers. If the PPI number came in as expected and continued to moderate from recent months (as it did) Klingensmith said that it would ease pressure on the Fed to tighten policy further “and delay any immediate test of the central bank's credibility.”

Last month, in its second meeting with Kevin Warsh as chair, the Fed maintained its strategy of keeping its policy rate steady, although there were three dissenting voices on the Federal Open Market Committee who preferred to raise the target range for the federal funds rate.

On Thursday afternoon the CME’s FedWatch tool puts the probability of rates being unchanged at 65.6% for September’s Fed meeting. A hike to between 3.75% and 4% has a likelihood of 34.4%, according to the tool, which updates in real time. The likelihood of a hold increased from Wednesday morning, when the tool gave it a probability of 55.9%.