The WSJ headlines the news about the Producer Price Index by noting that the index "unexpectedly" dropped in August. That's putting it mildly, to say the least.
Economists expected the PPI to increase 0.3% month-on-month as a result of price pressures due to tariffs that have begun to bite. That might have signaled mild-to-moderate inflation ahead and complicated the picture for the Federal Reserve. Instead, the new PPI simplified it by going into negative territory:
A gauge of wholesale inflation showed prices unexpectedly edged 0.1% lower in August, after jumping a month earlier. Economists had expected a 0.3% monthly rise. An equivalent readout on consumer prices is due Thursday.
"Just out: No Inflation!!!" President Trump posted on his social-media platform. He repeated calls for the Fed, under Chair Jerome Powell, to slash rates.
At least for now, Trump's right, and the Fed has no fig leaf for keeping rates at their current level. Not only is there no inflation in August -- at least in wholesale prices -- there seems to be a tad bit of deflation occurring. It's hardly enough for any concern, but it's surprising given the broad application of tariffs on imports at the moment. The drop came entirely in the service industry, as CNBC points out, but the price of goods barely nudged upward too:
Fed officials look not only at headline numbers but also the underlying drivers. The PPI report provided good news on inflation fundamentals. The service sector, which drives some 80% of GDP, saw outright deflation, falling 0.2%. Even goods prices, which are much more heavily impacted by tariffs, rose just 0.1%.
The CPI reading, due Thursday at 8:30 a.m. ET, will get more attention. As with PPI, the consensus outlook is for a 0.3% increase. About four-fifths of the CPI and PPI numbers feed into the Fed’s preferred inflation gauge, the personal consumption expenditures price index. CPI is the final big data point before the Fed’s rate decision a week from now.
Well, maybe. The Fed pays more attention to the Personal Consumption Expenditures (PCE) price index than to CPI, and the PCE Index for August isn't due for another couple of weeks. The PCE index has been relatively stable over the past few months, although it has increased slightly from 2.2% in April to 2.6% in both June and July. Presumably, the drop in prices on wholesale goods in August won't necessarily have impacted prices to end consumers in August, but the Fed probably will add that potential for the next couple of PCE Index reports in October and November when considering rate cuts.
The CPI report tomorrow won't be ignored, but the Fed calculates inflation mainly on trajectory rather than static data from previous months. If the PPI is showing slight deflation, it's a great opportunity to goose investment without creating or amplifying inflation in the short run, and even Jerome Powell can't miss that kind of opening.
Of course, they have missed it before. The Bureau of Labor Statistics produces the PPI Index report (more on that in a moment), and the index dropped into negative territory in March and April, according to their chart of seasonally adjusted data. That didn't prompt action from the Fed, perhaps because they wanted to wait for the impact of Trump's tariffs on prices before changing monetary policy. That would certainly be defensible, especially in light of the bad data from the BLS on job creation over the past two years, but that just doesn't apply any longer now.
But wait, I hear everyone saying, how can we rely on BLS inflation data when their core reporting on jobs is so poor? That's a good question, and it also applies to the CPI report tomorrow, too. The BLS produces the CPI Index as well as the PPI Index, for some reason, while the Bureau of Economic Analysis (BEA) produces the PPE Index. The BLS operates under the Department of Labor, while the BEA operates within the Department of Commerce. It's not clear why the Department of Labor is performing anything other than labor statistics, other than maybe it's just long tradition.
By the way, the Department of Labor Inspector General has launched a "review" of the problems at BLS and their unreliable reporting:
The Labor Department’s Office of Inspector General said Wednesday it is reviewing the “challenges” that the Bureau of Labor Statistics is facing in its data-collection efforts.
The internal watchdog, in a letter, said it was initiating that probe after BLS announced a reduction in its data collection for two key inflation metrics.
The review also comes in light of BLS recently issuing a “large downward revision of its estimate of new jobs in the monthly Employment Situation Report,” assistant inspector general for audit Laura Nicolosi wrote.
Perhaps one reform of BLS would be to remove those responsibilities and put them where they belong -- with an agency that is set up to deal with economic data. That could take place relatively quickly and allow both Labor and Commerce to focus on their core areas of expertise. It would also send a strong signal to the bureaucrats at Labor of consequences for incompetence or corruption, and the resulting loss of confidence in their work by people who need reliable data for important policy considerations.
The Fed might think so, too.
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