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PPI report, a precursor to what retailers and then consumers will pay later

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Like a one-two punch, yesterday’s CPI report combined with today’s PPI report suggests that inflation is and will remain persistent. Specifically rises in wholesale prices will be passed down the consumer chain. This implies that the level of inflation is likely to remain elevated well into next year.

Punch one, yesterday’s CPI report revealed that inflationary pressures last month rose to their highest monthly level this year. Punch two, today’s release of the PPI (Producer Price Index) also rose 0.7% last month. Because wholesale prices are passed down to the retailer and then to the consumer this index acts as a precursor, or forecast of what retailers and then consumers will pay months later.

The key takeaways from today’s PPI report are that wholesale pricing of partially completed goods jumped by 2.1% last month breaking the consecutive price declines over the prior six months. Also, the cost of raw materials increased by 1.3%. The only silver lining in today’s report was in the cost of services which rose by only 0.2% in August. Service prices slowed to 2.2% in August a dramatic decline from the peak of 9.4% which occurred in March 2022.

The primary root cause of both reports was a dramatic upside spike in energy costs. Wholesale energy prices spiked over 10% in August making it the largest underlying cause for the increase of wholesale pricing.

Today’s report did not lessen the probability of a pause by the Federal Reserve at their September FOMC meeting next week. According to the CME’s FedWatch tool, there is currently a 97% probability that the Fed will continue the pause of rate hikes that began at the last FOMC meeting in July. The Federal Reserve has raised rates at every FOMC meeting since its March 2022 meeting when it first raised the benchmark interest rate or Fed funds rate.

However, the probability of another pause in rate hikes in November had the largest percentage gain. Currently, there is a 66.6% probability that the Federal Reserve will maintain the current benchmark rate of between 5 ¼% and 5 ½% up from 57.4% yesterday.

Today’s report pressured gold futures to sink to their lowest value in approximately three weeks trading to an intraday low today of $1921.70. However, the most active December contract of gold futures recovered all of its declines. As of 5:59 PM EDT, December gold is fixed at $1932.50 which is unchanged on the day. Considering that gold is paired against the U.S. dollar and the dollar index gained 0.57% today the unchanged pricing of gold suggests that traders bid the precious yellow metal up by over a ½%. This is the only explanation for gold to currently be unchanged and the dollar index to be up 0.57%.

Wishing you as always good trading,

Gary S. Wagner - Executive Producer