We received two new insights into inflation this week with the release of August inflation data. The Producer Price Index (PPI) and the Consumer Price Index (CPI) were of added importance this week after last week’s weak jobs number as these data points may help determine if (and by how much) the Federal Reserve may cut rates next week.

PPI (a measure of wholesale prices) was released first. U.S. wholesale prices fell 0.1% last month (they had been expected to rise 0.3%). July’s reading was also revised downward, adding to the narrative that prices are falling even in the face of tariffs. The much-watched price of services also declined in the month (0.2%)

The core PPI, which excludes volatile food and energy prices, also declined 0.1% (versus expected increase of 0.3%)

CPI (a read on consumer prices) was released on Thursday. That metric rose 0.4%, slightly ahead of the anticipated 0.3%. However, Core CPI (which excluded food and energy and is the Federal Reserve’s preferred metric) was in line with consensus.

On an annual basis, CPI rose 2.9%, well above the Fed’s 2% target and the highest since January. CPI showed faster rises in food and energy costs, as well as the price of vehicles. Core CPI was steady at 3.1% annually.

“Headline CPI was stronger than expected thanks to stronger gains in the energy sector, but beyond that, there were notable gains across the goods sector. The strong gains in car and apparel prices show some impact from tariffs. At the same time, several parts of the services sector were firm, which shows the breadth of inflation gains continues to run relatively hot.” ~ Kevin Gordon, senior investment strategist at Schwab

All in, inflation reports were deemed “good enough” by markets. We are clearly not passed the inflation concerns but without meaningfully concerning trends, these reports likely give the Fed enough cover to start lowering rates.

Now What?

After the inflation reports, markets were pricing in a nearly 100% probability of a 25 basis point cut by the Federal Reserve at next week’s meeting. Equity markets rallied and interest rates fell, with the US 10 year rate falling below 4%. Why this reaction?

As we’ve discussed in recent weeks, the Federal Reserve bank has a dual mandate to the US economy – promote full employment (ie: keep the labor market healthy) and provide stable prices (ie: keep inflation under control). During early 2025, the Federal Reserve was focused on inflation as concerns over tariff-driven price hikes weighed heavily on their minds. The job market appeared to be in a decent place and as a result, the Fed decided it had time to wait. Last week’s dismal job report (and the revisions from BLS released this week) show the labor market is starting to crack and these inflation reports (again – not great but good enough), are likely to give the Fed the cover it needs to start to cut rates as early as next week.

As we’ve discussed in the past, falling rates tend to be a tailwind to equity prices. Lower rates (in general) tend to spark economic growth (hiring, borrowing, innovation, expansion, etc). Lower rates can also spur consumer spending as certain types of installment debt become cheaper and savings rates are less attractive. Lower rates also make equities relatively more attractive to their “safe asset” counterparts like cash and bonds, which now pay lower rates of interest, leading to fund flows into the asset class. And lastly, if equity prices are predicated on the future value of cash flows, all else equal, a lower denominator in that equation (ie: interest rate) will lead to an increase in fair value.

Fixed income also remains attractive. While rates will begin to come down, current yields/coupons remain historically high and principal values will rise as rates fall as well, adding to total returns.

Cash will become increasingly less attractive from a return perspective (as money market rates will fall in lockstep with Fed Funds). However, emergency funds and cash reserves are in place for many reasons beyond the available rate of return.

The likely downward move in rates next week, along with some exciting earnings releases concerning AI, led to a nice week in markets for equity and fixed income investors alike. If you are a participant in these markets, congratulations! You’re patience and commitment are being rewarded and it’s definitely an exciting time to compound wealth.

Onward we go,