July PPI Spike Puts Fed in a Tight Spot Ahead of Jackson Hole

Recent stock market action has been precariously driven by a combination of easing consumer inflation and persistent concerns over wholesale price pressures. After recovering from the slight pullback earlier in the month, equities continue to perform well supported by resilient earnings optimism and more clarity surrounding tariffs. Robust earnings, especially from mega-cap tech, and lingering dovish Fed sentiments are fueling rallies. However, bears are focused on sticky inflationary metrics, rising bond yields, valuation concerns, and overly optimistic sentiment which cast doubt on sustained gains.

Equities rallied earlier in the week on a softer July Consumer Price Index (CPI) reading, which investors interpreted as supportive of a September cut and potentially additional easing into year-end. Small-cap stocks logged a powerful two-day advance on Tuesday and Wednesday as rate-sensitive segments found fresh buyers.

The hot July PPI print definitely interrupted earlier momentum and positive market sentiment that improved following the July CPI print earlier this week, which was perceived as soft. Before the PPI release, the 2-year Treasury yield was down to the lowest in approximately three and-a-half months, but that move was quickly reversed. Core PPI excluding food and energy climbed 0.9%, lifting the annual rate to 3.7%. Sub-components such as services less trade, transportation, and warehousing, as well as goods excluding food and energy, moved higher. Taken together, the data suggests cost pressures are building across both goods and services, a dynamic that could strain corporate margins if companies choose to absorb the increases or risk reigniting consumer inflation if they pass those costs along.

Ultimately, July’s PPI has not upended the September outlook, but it has raised the bar for a string of follow-on cuts. Powell’s Jackson Hole message will aim to balance a labor market that has shown signs of cooling since the July employment report against the risk that upstream price pressures re-ignite inflation. For investors, that means the next leg of the move in stocks and yields will hinge less on any single data point and more on the interplay among producer costs, consumer prices, and the Fed’s tolerance for near-term volatility in pursuit of a soft landing.