"Soft PPI Sows Doubt on Cost-Pass-Through to Prices"

The U.S. Producer Price Index (PPI) for August 2025 declined by 0.1%, falling short of the widely anticipated 0.3% monthly increase, according to preliminary data. This marks a slowdown from the 0.9% rise recorded in July, and it signals a deceleration in price pressures from the goods and services sectors ahead of key inflation readings and policy decisions later this month. The annual PPI inflation rate stood at 3.3% in July, and the weaker-than-expected August figure may reinforce expectations that the Federal Reserve will ease interest rates at its September meeting.

The PPI report is considered a key precursor to the Consumer Price Index (CPI), which is due for release later this week. Recent data from regional price indexes indicate that inflationary pressures remain embedded in the economy, particularly in the prices paid for imported materials and parts, which have been elevated by tariffs. However, the August PPI’s decline, despite these factors, suggests that the pass-through of input costs to output prices has not been as direct as previously expected. Analysts are now weighing whether this trend could persist into the CPI data, which is expected to show headline inflation around 2.84% year-over-year and core inflation at 3.05%.

The weaker-than-expected PPI figure follows a similarly soft employment report, with nonfarm payrolls rising by just 22,000 in August, well below forecast. These data points have heightened the likelihood of a Fed rate cut on September 17, with market participants anticipating a liquidity injection that could drive down Treasury yields. The 10-year Treasury yield is currently seen as vulnerable to falling below 4.00% if inflation data continues to align with softer trends. However, any unexpected surge in CPI or PPI readings could delay the pace of easing.

The upcoming economic releases, including the preliminary benchmark revision of March 2025 employment data, will provide further clarity on the reliability of existing labor market metrics. The preliminary revision is expected to reveal that job growth was overestimated between April 2024 and March 2025 by up to 750,000, which could lead to upward revisions in productivity estimates. This, in turn, may strengthen the case for aggressive Fed easing, particularly if labor market slack becomes more apparent.

Meanwhile, broader market activity remains focused on corporate events and global political developments. Technology sector activity is expected to drive equity market performance as major firms like Apple, AMD, and Nvidia prepare for high-profile presentations. Overseas, markets are closely monitoring political shifts in Japan and France, where leadership changes could influence global investor sentiment. Domestically, the National Federation of Independent Business (NFIB) reported rising small business optimism in July, though a concurrent increase in uncertainty suggests mixed signals for the broader economy.