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Headline Drop in August PPI Misleading

RFP
The Producer Price Index (PPI) for final goods posted the first monthly decline in a year and a half in August. The drop was led by an 0.9% drop in trade services, which include margins for retailers, transportation and warehousing. The trend in transportation costs, however, is still up, suggesting a reversal in the months to come. Food prices also fell, helping to hold down the monthly change in the PPI. Energy prices were higher in August but expected to recede as we move into September. The overall PPI rose 2.8% on a year-over-year basis, well off a high of 3.4% in June.

The core PPI, which excludes the volatile food and energy components, edged up 0.1% in August. That follows a 0.3% increase in July. Gains were greater in the goods sector than in the service sector, reflecting the impact of tariffs, most notably on steel. Core PPI increased to 2.9%, meeting the peak in March. That suggest that underlying inflation pressures continue to build. The core PPI is a better predictor of future inflation than the overall measure.

Bottom Line
The headline drop in the PPI is misleading when it comes to underlying inflation pressures, which continue to build. Our forecast for two rate more hikes by the Federal Reserve this year is affirmed.

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