Stocks Just Below Record Highs into Inflation Data

The S&P 500 (SPX), Dow Industrial Index ($DJI) and Nasdaq-100 (NDX) are less than 1% below their all-time highs as risk-on trading continues this week. The moves come ahead of key inflation data with the August Producer Price Index (PPI) and Consumer Price Index (CPI) due on Wednesday and Thursday respectively. The reports, released by the U.S. Bureau of Labor Statistics (BLS), measure price changes from different perspectives and are crucial for the Federal Reserve when considering monetary policy decisions. For both investors and consumers, the PPI and CPI reports offer vital information about the economy. Inflation can erode purchasing power, affect long-term financial planning, and influence everything from government policies to interest rates on mortgages.

While both indices track price changes, their measurements are taken from different vantage points in the economy. The key differences between PPI and CPI include the perspective from which prices are measured (producer vs. consumer), the scope of goods and services included, and whether taxes are factored in. For the month of July, the CPI rose 0.2% month-over-month while the core (ex-Food and Energy) rose 0.3%. The year-over-year headline number rose to 2.7% while the core rate rose to 3.1%. While the numbers were mostly in-line with expectations, they are above the 2% that the Fed wants on the data as part of their mandate. The PPI in July surged past estimates with the year-over-year numbers hitting 3.3% on the headline and 3.7% on the core.

Expectations for the August PPI are projected to be in-line on the year-over-year numbers that we saw in July. The CPI is expected to come in up 0.3% on month-over-month for both headline and core numbers. The year-over-year numbers are expected to rise to 2.9% in August with the core number in-line at 3.1%.

While still above the Fed’s 2% mandate for inflation, expectations for a rate cut at next week’s FOMC meeting are at nearly 90% according to the CME’s FedWatch tool. Investors are looking past the tariff-induced rise in recent inflation data due to the weakness in the jobs market. Stocks rose after July’s inflation reports and traders look to be setting up for little risk to the downside at this point. If the PPI and CPI come in above expectations will investors act negatively and sell off equities at elevated valuations? They haven’t yet and are taking their cue from the worsening jobs data and may look past the numbers yet again.