U.S. wholesale price increases largely slowed last month, marking another indication that inflationary pressures are easing. This trend is creating room for the Federal Reserve to consider cutting interest rates in the near future, potentially as soon as next week. The recent data offers positive news for policymakers aiming to balance inflation control with economic growth.
On Thursday, the Labor Department reported that the producer price index (PPI) — a key metric that tracks inflation before it reaches consumers — rose by 0.2% from July to August. This figure is slightly higher than the flat reading from the prior month but still suggests a modest pace of inflation. On a year-over-year basis, wholesale prices increased by just 1.7% in August, the smallest rise since February. This is down from the 2.1% annual increase recorded in July, adding to signs that inflation may be stabilizing.
Excluding the volatile categories of food and energy, core wholesale prices — a better gauge of underlying inflation trends — increased by 0.3% from July to August. On a year-over-year basis, core prices have risen by 2.3%, a figure that indicates inflation is moving closer to the Federal Reserve’s long-term goal of 2%.
The latest wholesale price data suggests that inflation is returning to pre-pandemic levels after a period of sharp increases. Following the peak of inflation in mid-2022, when prices soared to a four-decade high, the costs of everyday essentials like gas, groceries, and automobiles have begun to stabilize. In some cases, prices are even falling. For example, energy prices dropped by 0.9% in August, while food prices ticked up by just 0.1%. Compared to a year earlier, wholesale food prices are down by 0.8%, which is a sign that grocery costs, though still elevated, are increasing at a much slower pace.
On Wednesday, the government’s Consumer Price Index (CPI) report echoed the same sentiment. The CPI, which reflects price changes at the consumer level, showed that inflation had increased by 2.5% in August on an annual basis. This is the mildest 12-month inflation increase in three years, reinforcing the broader trend of cooling inflation.
The slight uptick in core wholesale prices between July and August was driven primarily by a 0.4% increase in service costs. Categories like internet access and banking services were among those that contributed to the rise in service prices. On the other hand, the price of goods remained flat over the same period, showing that inflationary pressures on physical products are easing.
These latest inflation figures arrive in the wake of a political debate in which inflation was a prominent issue. Former President Donald Trump recently criticized Vice President Kamala Harris for the inflation surge that began after the Biden-Harris administration took office. Trump alleged that inflation under their leadership reached unprecedented levels. However, his claims were misleading. Inflation peaked at 9.1% in 2022, which is significantly lower than the 14.6% rate recorded in 1980.
The producer price index is closely watched by economists because it provides an early glimpse into where consumer inflation might be headed in the future. Components of the PPI, such as healthcare and financial services, also feed into the Federal Reserve’s preferred inflation gauge — the personal consumption expenditures (PCE) index.
In response to high inflation, the Federal Reserve raised interest rates 11 times over the course of 2022 and 2023. This aggressive rate-hiking campaign has pushed the central bank’s key interest rate to its highest level in 23 years. However, with inflation now hovering near the Fed’s 2% target, policymakers are signaling that rate cuts may soon be on the horizon. A modest reduction of 25 basis points is widely expected to be announced following the Federal Reserve’s meeting next week.
Lowering interest rates would help reduce the cost of borrowing across the economy, making it cheaper for consumers to take out mortgages, auto loans, and use credit cards. This, in turn, could boost economic activity and support hiring, especially as inflation continues to cool. Other central banks around the world, including those in Canada, the U.K., and Switzerland, have already begun cutting interest rates in response to easing inflation. On Thursday, the European Central Bank (ECB) lowered its benchmark rates for the second time this year, signaling that both inflation and economic growth are slowing across advanced economies.
In summary, the U.S. wholesale price index reflects a significant cooling in inflation, giving the Federal Reserve room to cut interest rates and further support the economy. As price pressures continue to ease, the central bank will likely take steps to ensure that inflation remains in check while fostering a healthier economic environment.
