29 Sept 2025
The recently released Producer Price Index report revealed figures significantly lower than previous forecasts, with monthly PPI showing a negative 0.1% decline across both gross and core measures. This unexpected decrease in retail inflation, observed for the first time in four months, reinforces arguments for a potential interest rate cut by the Federal Reserve at its upcoming September meeting.
The latest Producer Price Index (PPI) report showed figures considerably lower than previous periods and forecasts for both monthly and annual measures. Monthly gross and core PPI registered a negative 0.1% decline, indicating a more substantial decrease in the monthly figures compared to the annual ones.
The Producer Price Index experienced a notable decrease compared to the previous month, with the final demand index reaching 2.6%. This decline in the final demand index during August was primarily attributed to a 0.2% drop in prices for final demand services.
In contrast to services, the index for final demand goods saw a 0.1% increase. Furthermore, final demand prices, excluding food, energy, and trade services, increased by 0.3%, marking the fourth consecutive rise in this specific category.
The services sector experienced an overall 0.2% decrease, representing the largest drop since April when a 0.3% decline was observed. This reduction was largely driven by a 1.7% fall in the profit margins for trade services, an index that measures changes in the profit margins of wholesalers and retailers.
Final demand services, excluding trade, transportation, and warehousing, reached 0.3%, while transportation and warehousing services remained at 0.9%. A significant portion of the August decrease, specifically three-quarters, resulted from a 3.9% decline in profit margins for motor vehicle and equipment wholesalers, alongside reductions in professional and commercial equipment, chemical products, furniture, food and beverage retail, and data processing services.
Despite the overall decline in services, certain categories registered growth, including a 2% increase in portfolio management services, as well as growth in truck freight transportation and apparel retail.
The goods sector recorded a 0.1% increase, marking its fourth consecutive rise, primarily influenced by final prices excluding food and energy. The food goods index increased by 0.1%, while energy prices decreased by 0.4%.
Key drivers for the increase in food goods included a 2.3% rise in tobacco product prices and increases in meat and egg prices. Electronic devices like motherboards, modems, and modules also saw slight price increases. Conversely, natural gas prices fell by 1.8%, and indices for vegetables, eggs, and waste products also declined.
Processed goods for final demand showed the most significant increase, growing by 2.6%, which is the largest rise since January 2023 and represents an approximate 4% increase. The primary factor for this surge was a 5.5% increase in aluminum mill shapes, which also impacted other materials.
The report reveals an unexpected decrease in U.S. retail inflation for the first time in four months, significantly bolstering arguments for a Federal Reserve interest rate cut at its September 16-17 meeting. Companies, facing higher tariff-related costs in August, opted against substantial price increases, reversing the sharp growth seen in July due to concerns about deterring customers amid economic uncertainty.
The manner in which companies transfer tariff burdens to consumers is a critical determinant for the interest rate trajectory in 2026. While Fed officials anticipate import taxes will contribute to inflation later in 2025, they remain uncertain whether this inflation will be a temporary or persistent phenomenon.
Economists closely monitor the PPI report because several of its components are utilized in calculating the Personal Consumption Expenditures (PCE) index, which is the Federal Reserve's preferred inflation gauge.
The report presented contradictory results, with portfolio management services and apartment rents showing high growth, while some healthcare service measures exhibited more moderate growth. The market is awaiting tomorrow's Consumer Price Index (CPI) data to gain further insight into the extent of cost transfer to households, as a higher CPI could lead to a more cautious stance from the Fed.
Following the report's release, 2-year bonds, which are highly sensitive to monetary policy, experienced a slight decrease. This development further strengthened bets on interest rate cuts, solidifying expectations for a September rate cut and subsequent reductions in the coming months.
Overall, this report indicates that retail inflation in the United States unexpectedly decreased for the first time in four months, significantly strengthening arguments for an interest rate cut by the Federal Reserve at its September 16-17 meeting.
| metric | change | details |
|---|---|---|
| Overall Monthly PPI | Negative 0.1% | Lower than previous forecasts for both gross and core measures. |
| Final Demand Index | Decreased to 2.6% | Primarily due to a 0.2% drop in final demand services prices. |
| Final Demand Goods | Increased by 0.1% | Contrasting with the decrease in services prices. |
| Services Sector (Overall) | Decreased by 0.2% | Largest drop since April; driven by a 1.7% fall in trade services profit margins. |
| Goods Sector (Overall) | Increased by 0.1% | Fourth consecutive rise, influenced by prices excluding food and energy. |
| Processed Goods for Final Demand | Increased by 2.6% | Largest increase since January 2023; mainly due to 5.5% rise in aluminum mill shapes. |
| US Retail Inflation | Unexpected Decrease | First time in 4 months, strengthening arguments for Fed rate cuts. |
| 2-Year Bond Yields | Decreased | Reflects increased market betting on upcoming interest rate cuts by the Fed. |
