The U.S. July PPI greatly exceeded expectations, but does it threaten interest rate cuts?

The unexpected surge in the Producer Price Index (PPI) for July in the United States has brought new inflation signals to the market, but major Wall Street analysts believe this data is unlikely to shake the Federal Reserve's upcoming interest rate cut decision.

The latest data shows that the U.S. July PPI rose by 0.9% month-on-month, with the core PPI excluding food and energy also recording the same increase, far exceeding market expectations. Another core indicator excluding trade services also rose by 0.6%, similarly stronger than expected.

According to news from the Chasing Wind Trading Desk, despite the data appearing very hot on the surface, Citigroup stated in a research report on the 14th that it still expects the Federal Reserve to cut rates by 25 basis points in September and to continue cutting rates in subsequent meetings. Goldman Sachs and UBS also only made slight adjustments to their forecasts for the Personal Consumption Expenditures (PCE) price index after the data release, without indicating any fundamental change in their views on the Federal Reserve's policy path.

Analysts generally believe that the strong performance of the PPI this time is mainly driven by a few volatile service items, rather than widespread, sticky inflation pressures. At the same time, the much-watched impact of tariffs on commodity prices currently appears to be limited.

Core PCE Mild, Limited Signals of Persistent Inflation

A deeper analysis of the data reveals that the strength of the July PPI mainly comes from the service sector, rather than goods. Reports from Citigroup and Goldman Sachs both point out that the significant rise in portfolio management fees is a major driver.

According to Citigroup data, portfolio management fees surged by 5.8% month-on-month, while Goldman Sachs' data shows an increase of 6%. Analysts note that this item typically fluctuates in sync with asset prices (such as stock prices), and its rise does not indicate that underlying inflation pressures are broadly heating up. Citigroup expects that as asset price trends stabilize, this component will remain flat in August.

Additionally, Goldman Sachs mentioned that the strong rise in cable television and internet service prices also contributed to service sector inflation.

Meanwhile, the prices of medical services, which have a significant weight in the Federal Reserve's preferred inflation indicator PCE, performed relatively mildly. Goldman Sachs pointed out that the increase in healthcare service prices was lower than expected. Citigroup also noted that although dental service prices in the Consumer Price Index (CPI) rose sharply, prices for other medical services (especially doctor and hospital services) were much weaker than expected. This divergence further weakens the pessimistic outlook of the PPI data on overall inflation prospects.

Tariff Impact Not Yet Obvious

For investors, the commodity prices in the PPI are a key window to observe whether the impact of tariffs is being transmitted to the production side. However, Citigroup's analysis suggests that so far, this pressure seems limited. The report indicates that the furniture PPI prices, which performed strongly in previous months, saw a more moderate increase in July, which may suggest that the upward pressure on consumer-level home goods prices will be limited in the short term.

However, a concerning signal is that the PPI price of household electronic devices surged by 5% month-on-month. Citigroup stated that this sub-item has a certain correlation with the "video and audio products" in the CPI. Although the trends of the two are not completely synchronized, and PPI data may not accurately predict the direction of CPI, the significant increase in PPI in July has kept analysts vigilant about the upward risks of related items in the August CPI.

UBS research pointed out that in the coming months, tariffs will exert upward pressure on inflation, especially in the second half of this year and the first half of next year, with core PCE year-on-year expected to gradually approach 3.5%. However, prices for travel-related services may weaken, and the growth expectations for financial services are also declining. This means that the upward risks are limited, and there is still uncertainty regarding inflation retreating in some service sectors.

Wall Street Raises PCE Forecast, But Rate Cut Expectations Remain Unchanged

Based on the latest CPI and PPI data, Wall Street analysts have updated their forecasts for July PCE inflation but have not changed their expectations for Federal Reserve easing.

UBS's latest forecast indicates that the core PCE price index in the U.S. is expected to rise by 0.30% month-on-month in July, which is an upward adjustment of 5 basis points from the estimated value after the CPI. According to current calculations, the 12-month core PCE inflation rate is expected to rise from 2.79% in May to around 2.94% in July, with a high likelihood of approaching or even visually showing as 3.0%. The year-on-year core PCE price also rose to 2.66%, slightly up from the previous value of 2.58%.

Goldman Sachs stated in their report that they currently predict the core PCE price index will rise by 0.27% month-on-month in July, slightly higher than their previous prediction of 0.26% before the PPI report was released, corresponding to a year-on-year growth rate of 2.90%.

Citigroup expects the core PCE to grow by 0.29% month-on-month in July. The bank specifically pointed out that the inflation of services excluding housing and energy (i.e., "super core PCE") is expected to rise by 0.42% month-on-month, marking the strongest growth since February, but this is largely driven by contributions from portfolio management fees.

Despite the upward adjustment in short-term inflation forecasts, Citigroup remains firm in its view on Federal Reserve policy. The bank reiterated in its report that it continues to expect "weakening labor market and limited signs of persistent inflation will prompt Federal Reserve officials to cut rates by 25 basis points in September and continue to cut rates at each subsequent meeting until rates reach the range of 3-3.25%."