.png)
Key points
- US-producer price data for July came in substantially above the market’s expectations. In particular, the service sector showed the strongest producer price increase in 3 years. This mirrors the CPI print from two days ago, when service price inflation for consumer showed tangible price pressure, while goods price increases for July were more tamed.
- The higher-than-expected producer prices for the overall basket but particularly for the service sector seem to confirm the underlying price pressures—already exhibited in the consumer price indices— and is bad news for the US central bank’s fight against inflation. Market expectations for several key rate cuts in the next months will likely get partially priced out now. This move led markets to react overall negatively, with the USD gaining strength, as well as yield increases of US treasuries and the US equity futures in the reds.
- After observing these inflation numbers, we stick to our view that the current trade tariff and overall economic environment in the USA will probably not let the US-Fed to lower its key rate by more than 1 cut for the remainder of the year.
Today’s producer price index (PPI for final demand) showed a surge in prices that was significantly above the market’s expectations. This is bad news for the US central bank and the risk-on mood for financial markets.
The producer prices of the overall basket showed a change for July prices versus June prices of 0.9%, well above the expected 0.2% by forecasters. On a year-on-year basis, comparing July this year with July last year, the PPI increased by 3.3% instead of the expected 2.5%, while the core PPI—extracting usually volatile food and energy prices from the overall basket—even increased by 3.7%. Producer prices from the service sector jumped by 4% from a year ago and posted the highest monthly surge in the last 3 years. Meanwhile, in the trade sector—which is under particular scrutiny from investors to gain insights into the price pressures from higher US-import tariffs—prices surged by 6.9 percent.
The jump in the service producer prices will likely worry the US central bank (Fed) as large price increases in this sector are bad news for the rate-setters’ efforts to further tame inflation and will likely disrupt the current market expectation that the Fed will cut rates quickly and make several reductions before the end of the year. Even more so as today’s price increases from the producer’s point of view are matching with the inflation data from the consumer’s side two days ago.
Consumer price data showed a similar pattern
The consumer price index (CPI) released last Tuesday was mostly in line with financial market’s expectations. The inflation data showed that prices did increase in July by 2.7% for the total consumer basket, and by 3.1% for the so-called core inflation that excludes the prices of energy and food–both numbers are on a year-on year basis, comparing prices from July 2025 to July 2024.
At that time, markets saw the lower than expected “pass-through” of tariffs in the consumer goods data as a positive sign, and probabilities for a Fed cut in September did increase which led markets rallying.
However, also in the CPI print, the consumer prices from the service sector – the part of the CPI basket that should cool down when the economy is losing steam – was exhibiting a strong and increasing price grow of 3.6% on a year-over-year basis.
In addition, the super-core measure—which the Fed has closely monitored in the past as a reliable gauge for domestic consumer services and an indirect measure for wage growth pressure—rose further to a high of 3.3%, the largest annual increase since February this year.
We still think the Fed will do less than markets expect
Today’s PPI data is obviously not a positive sign that US-inflation is under control and will create some headaches for the US-rate setters. Notably, price increases in the service sector are gaining strength rather than losing momentum, which would usually be anticipated at this stage of the business cycle and this in an area arguably unaffected by the tariff hikes. An increase in the service sector prices on both producer and consumer sides could prove even more perilous, as it signals that price pressures are building in areas closely linked to domestic services. It seems reasonable to argue that the Fed fears price pressures in these areas and is set to be much less inclined to cut rates when they stay on levels above 3% for the CPI or even at 4% for the PPI. This is why we continue to assess that financial markets currently expect too many rate cuts from the Fed in the remainder of the year and stick to our baseline scenario of only 1 rate cut until the end of 2025.
Chart 1: Producer prices rose more than consensus had expected
Source: Bureau of Labour Statistics, Bloomberg
Chart 2: Service sector prices for producers and consumers on elevated levels and rising
Source: Bureau of Labour Statistics, FactSet
Disclaimer
This marketing document has been issued by Bank Syz Ltd. It is not intended for distribution to, publication, provision or use by individuals or legal entities that are citizens of or reside in a state, country or jurisdiction in which applicable laws and regulations prohibit its distribution, publication, provision or use. It is not directed to any person or entity to whom it would be illegal to send such marketing material. This document is intended for informational purposes only and should not be construed as an offer, solicitation or recommendation for the subscription, purchase, sale or safekeeping of any security or financial instrument or for the engagement in any other transaction, as the provision of any investment advice or service, or as a contractual document. Nothing in this document constitutes an investment, legal, tax or accounting advice or a representation that any investment or strategy is suitable or appropriate for an investor's particular and individual circumstances, nor does it constitute a personalized investment advice for any investor. This document reflects the information, opinions and comments of Bank Syz Ltd. as of the date of its publication, which are subject to change without notice. The opinions and comments of the authors in this document reflect their current views and may not coincide with those of other Syz Group entities or third parties, which may have reached different conclusions. The market valuations, terms and calculations contained herein are estimates only. The information provided comes from sources deemed reliable, but Bank Syz Ltd. does not guarantee its completeness, accuracy, reliability and actuality. Past performance gives no indication of nor guarantees current or future results. Bank Syz Ltd. accepts no liability for any loss arising from the use of this document.
Related Articles
Meanwhile, Big Tech carries the S&P 500. Each week, the Syz investment team takes you through the last seven days in seven charts.
Nvidia posts exceptional earnings, yet a dramatic Thursday sell-off raises questions: do investors still fear an AI bubble?
Meanwhile, quantitative easing might be making its comeback. Each week, the Syz investment team takes you through the last seven days in seven charts.