US July PPI data cools, CPI at 3.5% strengthens Fed cut case

Cooler inflation data from both the producer and consumer side is reshaping expectations for Federal Reserve policy.

US producer prices came in cooler than expected in July, following Tuesday's consumer price index that showed annual inflation slowing to 3.5%, strengthening the case for the Federal Reserve to begin cutting rates. Food and energy prices accounted for the biggest declines in both reports, according to the data.

"Food and energy played the biggest roles in the cooler-than-expected numbers," said Kevin Hincks, who noted the similarity between the PPI and CPI trends. One Federal Reserve official said inflation has peaked, a statement that aligns with the disinflation trajectory shown in both reports.

The July PPI print extended the disinflation trend after the CPI report showed inflation running at 3.5%, down from prior readings. Core inflation measures, which exclude volatile food and energy components, also moderated, reinforcing the view that price pressures are easing across the broader economy. The Japanese yen rose against the US dollar following the data, as cooler CPI readings reduced expectations for further Fed tightening, according to FXStreet.

For the Federal Reserve, the back-to-back cooler inflation prints reduce the pressure to maintain its hawkish posture. Markets are now pricing a higher probability of a rate cut at the next Federal Open Market Committee meeting, a sharp reversal from earlier this year when sticky inflation had pushed expectations toward additional hikes. The shift in rate expectations has broad implications for corporate borrowing costs, equity valuations, and housing market activity.

The key question going forward is whether the disinflation trend can sustain through the second half of 2026. Energy prices remain a wild card, with U.S.-Iran geopolitical tensions adding uncertainty to crude oil supply. A sustained spike in oil prices could feed back into headline inflation measures, potentially slowing the pace of disinflation. The Fed's next policy decision will be closely watched for any shift in forward guidance that reflects the latest data.

This article is for informational purposes only and does not constitute investment advice.