July’s U.S. Producer Price Index (PPI) barely budged, creeping up by just 0.1%. That’s weaker than what the market expected, as forecasts had pegged it at 0.2%.
Last month, the PPI also rose by 0.2%, so this is a clear sign that the pace of inflation is continuing to slow down, although the grind is slow.
On an annual basis, the PPI climbed 2.2% in July. Again, this was softer than what analysts were expecting. They thought it would be closer to 2.3%, but it landed below that.
To make matters even more interesting, the previous annual rate got revised up to 2.7% from 2.6%. What’s driving this deceleration? A mix of declining service prices and only modest increases in commodity costs.
Simply put, inflation is losing steam.
Now we cut rates?
Investors are now stuck in a guessing game about what the Federal Reserve will do next. The central bank has been on a relentless mission to crush inflation, hiking interest rates 11 times in the last couple of years.
The rates are now at levels we haven’t seen in over two decades. But with inflation slowing, everyone’s wondering if the Fed is going to start slashing rates soon.
The CPI data that’s about to drop will be a big piece of the puzzle. Analysts are predicting the Consumer Price Index (CPI) for July to show a 3.0% year-over-year increase.
That would be in line with what we saw in June. They’re also expecting the core CPI, which excludes the more volatile food and energy prices, to dip slightly to 3.2% from 3.3%.
If these predictions hold up, it’ll be more evidence that the Fed’s aggressive rate hikes are working, and maybe, just maybe, they’ll start cutting rates as early as September.
A rate cut would make borrowing cheaper, which could rev up economic activity and potentially give all financial markets a boost.
Markets respond to cooling inflation
So, how’s the market reacting to all this? Well, it seems like investors are getting a bit more optimistic.
Major stock indices like the S&P 500 and the Nasdaq Composite have been in the green, riding the wave of cooling inflation.
The PPI data, in particular, has been a positive signal for them because it’s often seen as an early indicator of consumer price trends.
Over in the crypto world, things have been heating up too. QCP Capital noted that Japanese stock prices have rebounded to their pre-crash levels. But there’s still a cloud of caution hanging over everything as investors wait for the U.S. CPI numbers.
The big question is whether the Fed will cut rates by 50 or 25 basis points in September. Right now, the odds are split right down the middle.
Meanwhile, Ethereum (ETH) has been getting a lot of love from institutional investors. Cumulative inflows into ETH spot ETFs have now surpassed $901 million, thanks to yesterday’s net inflow.
Even more interesting, Grayscale didn’t see any outflows, which is a first. This has given ETH prices some solid support and could be the start of a more major recovery.
