Service Sector Weakness Bolsters Dovish Case
A key driver of the weaker PPI was a 0.2% decline in services prices, with trade services down 1.7%. Notably, margins for machinery and vehicle wholesaling fell 3.9%. These sectors are closely monitored by the Fed for insights into broader pricing pressures and monetary policy impacts.
Goods prices inched up just 0.1%, held down by a 0.4% decline in energy costs. Food prices were marginally higher, rising 0.1%, while core goods excluding food and energy saw a 0.3% increase. Even with these modest gains, overall price pressures appeared subdued.
Tariffs and Labor Concerns Enter Fed Calculus
Though inflation remains above the Fed’s 2% target, officials have pointed to easing rent and wage pressures as reasons for patience. However, Trump-era tariffs continue to impact specific categories, including a 2.3% surge in tobacco prices. The broader concern remains whether these tariffs, combined with slowing job growth, could weigh more heavily on economic activity.
Recent data revisions showing nearly 1 million fewer jobs created in the year ending March 2025 have heightened concerns over labor market health, even as Fed commentary continues to frame employment as “solid.” This reassessment could be another factor pushing policymakers toward easing.
Fed Rate Cut Outlook: Bullish Case Builds, But Eyes on CPI
The PPI data adds to the bullish narrative for a Fed rate cut next week. However, traders are watching Thursday’s Consumer Price Index (CPI) print closely for confirmation. If CPI also shows easing inflation, expectations for not just a rate cut—but potentially more than one—could solidify. For now, bond markets and equity futures suggest growing confidence that the Fed will deliver, keeping the short-term outlook for equities bullish and Treasury yields under pressure.
