2026 Rate-Hike Expectations Plummet After Cooler-Than-Expected PPI

Following yesterday's cooling (in-line) consumer price inflation data (driven in large part by energy deflation), US producer prices were expected to rebound modestly in July from a 0.3% MoM decline (headline) in June.

Instead, headline Producer Prices were unchanged MoM (cooler than expected), pushing the annual change down from +5.5% to +4.7% YoY...

Source: Bloomberg

Core PPI (Ex Food and Energy) also printed cooler than expected (+0.2% MoM vs +0.3% MoM), dragging Core PPI YoY down to +4.2%...

Final demand services: Prices for final demand services advanced 0.2 percent in July after rising 0.5 percent in June. The July increase can be traced to the index for final demand services less trade, transportation, and warehousing, which moved up 0.6 percent. Conversely, the indexes for final demand transportation and warehousing services and for final demand trade services decreased 1.8 
percent and 0.1 percent, respectively. 

• Product detail: Leading the July increase in prices for final demand services, the index for portfolio management advanced 6.5 percent. Margins for health, beauty, and optical goods retailing; automobiles and automobile parts retailing; lawn, garden, and farm equipment and supplies retailing; food and alcohol retailing; and food and alcohol wholesaling also moved higher. In contrast, prices for truck transportation of freight fell 1.8 percent. The indexes for machinery and vehicle wholesaling and for securities brokerage, dealing, and investment advice also decreased.

As stocks accelerate to new highs so portfolio management costs soar...

Final demand goods: The index for final demand goods fell 0.7 percent in July after moving down 1.4 percent in June. A major factor in the July decrease was a 3.1-percent decline in prices for final demand energy. The index for final demand foods moved down 0.9 percent. Conversely, prices for final demand goods less foods and energy increased 0.1 percent.

• Product detail: More than half of the July decrease in the index for final demand goods can be attributed to a 5.7-percent decline in prices for gasoline. The indexes for fresh and dry vegetables, diesel fuel, jet fuel, residual fuels, and thermoplastic resins and materials also fell. In contrast, prices for motor vehicles and equipment moved up 0.3 percent. The indexes for electric power and for grains also increased.

Energy remains a major driver of the deflationary impulse...

The full breakdown:

Goods deflated for the second month in a row while services rose for the second month in a row...

The recent rapid surge in memory prices has stabilized (but is not dropping)...

The CPI-PPI spread continues to (broadly speaking) signal increased pressure on corporate margins...

So, the bottom line is that energy price declines are now deflationary while soaring memory costs and stock portfolio management fees are driving aggregate prices higher...

So should The Fed pop the AI/Memory/Compute bubble? (in the same way it's unable to impact a supply shortage in the energy markets)

Which overall means that the market is now pricing in LESS THAN ONE rate hike in 2026...

Rate-hike expectations remain flat from yesterday as today's PPI merely confirmed the lack of pressure on Warsh to act with any urgency.