Producer Inflation Preview: Why Is Fed Chair Powell Closely Watching Thursday's Wholesale Prices?

After a hotter-than-expected Consumer Price Index (CPI) report, investors are preparing for another high-impact inflation release.

On Thursday at 8:30 a.m. ET, markets will scrutinize the Producer Price Index (PPI) report for January, which sheds light on inflationary pressures at the production level.

Expectations For January PPI

Economists anticipate a slight easing in headline producer inflation, with a year-over-year decline from 3.3% to 3.2%. On a monthly basis, PPI is expected to rise by 0.3%, accelerating from December’s 0.2% increase.

Excluding food and energy, core PPI is projected to ease from 3.5% to 3.3% year-over-year. However, on a monthly basis, core PPI is expected to rise by 0.3%, rebounding from December’s flat reading.

Despite the expected moderation in annual figures, likely affected by base effects, the monthly acceleration suggests persistent inflationary pressures that investors cannot ignore.

Fed Chair Powell’s Take On Inflation Metrics

Speaking before the House Financial Services Committee on Wednesday, Federal Reserve Chair Jerome Powell said that consumer inflation “was above all forecast” and reinforced the Fed’s cautious approach to rate cuts.

“The Fed is in no rush to cut interest rates. We have the luxury to wait,” Powell added.

When asked about the inflation level that would justify rate reductions, Powell reiterated that the Fed primarily targets Personal Consumption Expenditures inflation, which he considers a more accurate measure of inflationary trends.

“Tomorrow we’ll get the Producer Price Index… we’ll actually know what the PCE readings are late tomorrow,” Powell said, highlighting the importance of the PPI release.

The significance of the PPI stems from its impact on the PCE inflation gauge, a key metric the Fed monitors when setting interest rates.

If the PPI comes in stronger than expected, especially alongside an already elevated CPI, it will push the PCE up, reinforcing the Fed’s commitment to maintain interest rates steady for an extended period.

On Wednesday, the S&P 500, as tracked by the SPDR S&P 500 ETF Trust SPY, closed 0.3% lower amid rate cut uncertainty. Blue-chip stocks, represented by the SPDR Dow Jones Industrial Average ETF DIA, also saw slight declines.

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