Inflation Leading Indicator "Goes Through the Roof," Fed Rate Cut Prospects Face Uncertainties

On Thursday, August 15th, the U.S. Bureau of Labor Statistics (BLS) released a report. It showed that wholesale prices rose significantly more than expected in July, driven by a surge in profit margins. This may indicate that inflation still poses a threat to the U.S. economy. Service inflation was a key factor in the overall increase in the Producer Price Index (PPI). Service prices rose by 1.1% in July, which was also the largest increase since March 2022. The report indicated that although there was weak demand in the first half of this year, businesses are adjusting the pricing of goods and services to help offset the costs associated with U.S. tariff increases. How much of the tariff costs businesses pass on to consumers will be a key factor in shaping future interest rate trends. Due to Trump's policies, especially the economic uncertainty brought about by tariff policies, businesses have reduced the number of new hires. However, the relatively low initial claims numbers suggest that employers are not laying off workers on a large scale. Earlier this week, the July Consumer Price Index (CPI) report was generally in line with expectations, leading the market to almost completely believe that the Federal Reserve will cut key interest rates at the September meeting. After the release of the latest U.S. economic data, traders reduced their bets on a Fed rate cut in September. Meanwhile, some analysts are still downplaying the significance of last month's weak employment data, suggesting that the slowdown in the labor market is due to a decrease in labor supply caused by Trump's immigration policy. If that is the case, then Powell's decision to hold steady is the right one, as a rate cut would have no impact on the softness in labor supply.