Markets woke up to a bona fide downside surprise: August producer prices fell broadly against expectations, resetting the inflation narrative on the eve of CPI and nudging the Fed closer to easing. Headline PPI declined 0.1% m/m (consensus +0.3%) after +0.7% in July, pulling the y/y rate to 2.6% (consensus 3.3%, prior 3.1%). “Core” PPI ex-food & energy also fell 0.1% m/m (consensus +0.3%, prior +0.7%), while the y/y pace cooled to 2.8% (consensus 3.5%, prior 3.4%). Under the hood, the BLS’s “core-core” gauge—PPI ex food, energy, and trade services—rose 0.3% m/m and 2.8% y/y, a reminder that some sticky components remain even as headline pressures ebb.

Where the cooling came from

The step-down was led by services, with final demand services -0.2% m/m, the largest drop since April. Most of that softness came from trade services margins (-1.7%), i.e., the markups wholesalers and retailers earn. Inside trade, machinery & vehicle wholesaling margins fell 3.9%, with additional weakness in professional/commercial equipment wholesaling, chemicals wholesaling, furniture retailing, food & alcohol retailing, and data processing & related services. Offsetting pockets of strength included portfolio management (+2.0%), truck freight, and transportation & warehousing (+0.9%)—areas still benefiting from market activity and, in freight’s case, lingering capacity/pricing resets.

On the goods side—the market’s most watched swing factor this cycle—final demand goods +0.1% m/m marked a muted print. The composition matters: energy -0.4% (notably utility natural gas -1.8%) and foods +0.1%, while goods ex-food & energy +0.3%. Items exerting upward pressure included tobacco products (+2.3%), beef & veal, processed poultry, printed-circuit assemblies/boards/modules/modems, and electric power. Offsets came from fresh & dry vegetables, eggs, and copper scrap. Net-net: least pricing pressure was evident in energy inputs, select agricultural categories, and wholesale/retail margins; firmness persisted in core manufactured goods (notably electronics-related components) and select financial/transport services.

Why this matters for CPI and the Fed

Today’s PPI miss lowers the bar for CPI: Citi already penciled in +0.31% m/m core CPI, anticipating softer shelter and fewer one-off boosts in medical services. A benign PPI print—especially the services give-back and soft goods headline—argues that pipeline price pressure into consumer categories is easing, even if core-core producer prices aren’t outright soft. That mix supports a cooler CPI trajectory, or at minimum reduces the risk of an upside CPI surprise.

Policy expectations adjusted accordingly. The PPI report heightens chatter about a 50 bp cut next week, but Fed funds futures still price only ~10% odds; the base case remains a 25 bp cut. Where PPI does move the needle is on tone and path: if CPI cooperates tomorrow, Chair Powell can credibly lean more dovish—framing progress on disinflation amid a labor market that’s weaker than previously thought (remember the large benchmark revision that shaved ~1M jobs from the prior year). That combination—cooling prices + softening jobs—builds the case for additional easing in late 2025 (another 25–50 bp in aggregate), even if the Committee resists a larger move next week.

The goods lens: why it’s pivotal now

Goods disinflation has been the relief valve throughout this cycle, offsetting sticky services. Markets have zeroed in on goods PPI because it feeds quickly into retail pricing and corporate margins. August’s +0.1% on goods—helped by -0.4% energy and offsets in produce/metals—signals limited pass-through pressure into consumer prices near-term. The +0.3% in goods ex-food & energy shows residual firmness in value-added manufactured inputs (think electronics and components), but the magnitude is modest. If energy remains tame and supply chains stay unclogged, the goods channel should continue to anchor the inflation downtrend.

Where pricing pressure is least

• Energy, especially utility natural gas.
• Selected food categories (vegetables, eggs).
• Wholesale/retail margins across several durable and discretionary categories (trade services).

Where pricing pressure is most

• Core manufactured goods (printed-circuit assemblies/boards/modules), consistent with ongoing tech capex and component demand.
• Tobacco products (+2.3%), reflecting policy/tax/tariff dynamics rather than broad inflation.
• Portfolio management (+2.0%) and elements of transportation & warehousing (+0.9%), linked to market/throughput dynamics rather than generalized price heat.

Market take and the road ahead

For risk assets, today’s PPI achieves the rare trifecta: cooler inflation, still-growing economy, and no new supply shock—a setup that extends the runway for equities and calms duration. The services retracement specifically reassures the Fed that July’s spike was an outlier, not a trend. Tomorrow’s CPI can still upset the

Bottom line: August PPI delivered a decisive downside surprise with services margins doing the heavy lifting and goods showing only tentative firmness ex-energy. Unless CPI springs a meaningful upside shock, the report strengthens the case for a quarter-point cut now, and—more importantly—for easier policy guidance into 2025 as inflation cools and the labor market downshifts. In other words: the inflation scare took a step back; the Fed can take a step forward.