While the latest producer price index (PPI) reading agreed with expectations and by some measures was even lower, some economists raised their forecast for core personal consumption expenditures (PCE), which has been the Federal Reserve's favorite inflation indicator historically.
The economists cited broker fees as the difference.
Morgan Stanley's chief U.S. economist, Michael Gapen, increased his July core PCE expectation to 0.23% month-over-month compared with a 0.20% estimate before Thursday's PPI report. He said that the upward revision reflects firmer-than-expected financial services — specifically fees from portfolio management and advice — although this was "partially offset by softer healthcare and airfares."
Gapen noted that the firm could update its projections again after import price data comes out next week, although he said that these revisions have tended to be modest in the past.
Fifth Third Commercial Bank's chief U.S. economist Bill Adams said that while core PPI was roughly as expected, it includes "upward implications" for July's core PCE report.
Adams pointed to the 6.5% jump on the month for portfolio management services, which are up 22.5% on the year. The category tracks closely with stock market indexes, and as Adams noted, "The market is way up over the last 12 months."
But while the big July increase will boost core PCE inflation in the next release, Adams pointed out that the contribution will be revised down on September 30, due to planned revisions that are expected to make the calculation less sensitive to the level of the stock market, according to the economist.
As for what the data means for the U.S. central bank's policy, Adams wrote, "For the Fed, the PPI report doesn’t change the big picture on inflation: It’s too high, but core inflation is lower than the headline, and the picture for both improved in July."
However, since August CPI and PPI reports will come out before the Fed's September meeting, the latest data "aren't the final word."
Markets and rates move after inflation data
S&P 500, Nasdaq gain, Dow dips
Real Estate leads S&P 500 sector gainers; Materials weakest group
Euro STOXX 600 index ~flat
Dollar slips; gold, U.S. crude both down ~1%; bitcoin edges up
SPY•
