The US producer prices index data will be released by the Department of Commerce ahead of tomorrow’s consumer price index data.
Economists are forecasting that the producer prices index will rise at a slower pace of 0.1% on the month. In July, headline PPI rose 0.2% on the month.
This is expected to keep the headline PPI unchanged at 1.7% on the year. This marks the same level of increase as the month before.
Excluding the volatile food and energy prices, the core PPI is forecast to rise 0.2%, reversing the decline of 0.1% in July.
Get our Weekly Commitment of Traders Report: - See where the biggest traders (Hedge Funds and Commercial Hedgers) are positioned in the futures markets on a weekly basis.
Get Our Free Metatrader 4 Indicators - Put Our Free MetaTrader 4 Custom Indicators on your charts when you join our Weekly Newsletter
On a year over year basis, expectations are for the core PPI rate to nudge higher to 2.2% from 2.1% previously.
The producer prices index data is likely to be overshadowed with the inflation and retail sales numbers lined up over the remainder of the week.
The decline in the PPI for final demand was the first since October 2015. This was the underlying producer price index data. However, the headline PPI inched higher with an uptick in the cost of energy prices. But this could change in the upcoming data for August.
Energy prices, especially the price of international crude oil and gasoline prices, ticked lower in August. This could potentially see the underlying producer price index coming out lower again.
It would mark a second consecutive monthly decline.
Given the current economic landscape, the negative data is likely to put the onus on to the Fed to cut rates.
Meantime, economists continue to assess the impact of the tariff wars with China. So far, the US tariffs have had only a marginal impact. This is because most of the goods on which tariffs were increased fall into the capital goods category.
Producer Prices Remain Tame
The producer prices index briefly ticked higher in the months of March and April this year. The PPI change rose 2.2% for two consecutive months before steadily declining.
The declines in the PPI are mostly attributed to falling energy prices. Final demand for goods also remains somewhat weak, contributing to the downtrend.
However, we do not next the PPI to continue this trend in the near to medium-term outlook. There is scope for the PPI to eventually lift higher.
Various measures of manufacturing PMI, both in the US and in other developed economies show a disappointing trend.
Most of this is blamed on the trade war escalation and protectionist policies.
Meanwhile, fuel prices also remain weak. President Trump has made his intentions clear about keeping oil prices low. This stands in contrast to the oil producers’ expectations of higher prices.
Impact on Monetary Policy
From an economic perspective, the PPI data that will be coming out today is likely to be brushed aside. Meanwhile, the Federal Reserve will be holding its FOMC meeting in a week’s time.
The markets are bracing for another rate cut at this month’s meeting following the July cut.
However, back then, Fed Chair Powell said that it was only a mid-cycle adjustment. It will be interesting to see how the Fed’s forward guidance will look in September.
There is no doubt that the US economy has been losing steam since the start of this year.
Last week, in a speech, Powell cautioned that lower interest rates could put the central bank on the spot. He said that with lower rates, there is little room for the central bank to battle cyclical downturns.
With the global economy going through an uncertain patch, there has also been a downturn in global manufacturing.
As long as global demand remains subdued alongside oil prices, it is likely that the indicators such as the PPI will remain sluggish.