U.S. July PPI came in unexpectedly flat, while core metrics accelerated; Fed hawks remain pressuring for policy action, with the probability of a September interest rate hike falling to around 40%.

U.S. July Producer Price Index (PPI) year-over-year came in at 4.7%, the lowest since March, below the market consensus of 4.9% and a sharp drop from the prior reading of 5.5%. The monthly PPI was flat, missing the 0.2% forecast. Core PPI year-over-year hit 4.2% in line with expectations, while monthly core PPI rose 0.2%, below projections. Also released, initial jobless claims totaled 209,000, the highest since the week of July 11, exceeding the 202,000 forecast. On a structural basis, goods were the main drag on prices: energy prices fell 3.1% month-over-month, and food prices dropped 0.9%. However, core final demand PPI, which excludes food, energy and trade services, accelerated to 0.4% MoM from 0.1%, indicating underlying price pressures have not fully faded. This, paired with the earlier July Consumer Price Index (CPI) year-over-year decline from 3.5% to 3.4%, marks two consecutive months of moderate inflation signals. Market pricing for a Federal Reserve rate hike in September has cooled notably, with traders’ bet probability falling to around 40%, though hawkish voices have not abated. Cleveland Federal Reserve President Hamaker today reiterated the necessity of a rate hike, saying “current policy is not restrictive enough”, inflation is widespread, and the Fed must be accountable for inflation data. Richmond Fed President Barkin, meanwhile, noted that a rate hike remains an open question: while there is reason to believe inflation will ease as shocks like tariffs and oil prices fade, price pressures may have become entrenched, requiring weaker demand or additional rate hikes to meet targets. Overall, the signals lean more toward a “wait and see” approach rather than a shift to monetary easing. Upcoming August inflation and jobs data, along with oil price trends, will be key variables for the September policy decision.