Hot wholesale prices data puts wrinkle in Fed’s rate-cut roadmap

A jump in wholesale prices is likely to bolster concerns among Federal Reserve policymakers that rising inflation remains a risk, intensifying debate over the rationale for an interest rate cut next month and leaving the tension between the U.S. central bank and the White House unresolved.

The Producer Price Index increased 0.9% in July on a month-over-month basis, well above economists' expectations, a report from the Labor Department's Bureau of Labor Statistics showed on Thursday. Trade services inflation, a measure of retail and wholesale margins, rose 2%, the fastest pace in a couple of years and a possible signal of higher prices being passed along to consumers instead of absorbed through lower profits.

Analysts said the increase could be a precursor of higher consumer prices, which to date have reflected a more limited impact from the Trump administration's higher tariffs than initially expected. The data virtually eliminated in the minds of investors the likelihood of a larger-than-normal half-percentage-point cut at the Fed's September 16-17 meeting, and left policymakers to decide how to justify and frame an expected quarter-percentage-point cut next month with inflation still well above the U.S. central bank's 2% target. Investors may get a taste of how Fed Chair Jerome Powell sees the situation next Friday, when he is due to speak at the annual Kansas City Fed's central banking conference in Jackson Hole, Wyoming. In July, Powell gave little steer at all toward a coming rate cut.

Following the PPI report, analysts said they expected the Personal Consumption Expenditures price index excluding volatile food and energy costs, a statistic the Fed regards as an important guide for its inflation target, to have increased 2.9% on a year-over-year basis in July. The next PCE report will be released on August 29. Recent cracks in the labor market did cause a reassessment of the risks facing the economy, St. Louis Fed President Alberto Musalem said in a CNBC interview on Thursday, with slow growth threatening the job market and possibly warranting a cut if the weakness continues. But Musalem said with inflation perhaps nearing 3%, he needs further data before making a call on what to do in September, given the fact that the economy is still adapting to rising import taxes.

"I expect … most of the impact of tariffs on inflation to fade after two to three quarters … But there is a reasonable probability that they could be more persistent," said Musalem, who is a voting member of the Fed's rate-setting committee this year.

In comments to the National Association for Business Economics on Thursday, Richmond Fed President Thomas Barkin said it remained unclear whether the Fed's employment or inflation goals were more at risk right now.

"High unemployment is, in fact, disinflationary. Or is inflation high enough or sustained enough that it's going to put inflation expectations at risk? And I think that's the trade-off you're trying to manage," Barkin said.

The Fed will receive the August employment report and consumer price data for that month before its September meeting, releases that could prove pivotal to both a decision on cutting rates and to whether any reduction in borrowing costs is characterized as the start of a cutting cycle aimed at moving monetary policy to a "neutral" setting, or as an adjustment that may or may not be followed by further moves. Two Fed governors, Christopher Waller and Vice Chair for Supervision Michelle Bowman, dissented against the decision to hold rates steady at the Fed's policy meeting last month, favoring a quarter-percentage-point cut.

Investors still consider a regular-sized rate cut of 25 basis points as a likely outcome next month, but the odds of a cut dropped from nearly a 100% certainty to about 90% after the release of the producer prices data.