#USPPIComesInBelowExpectations

One More Soft Inflation Report Is Reshaping Market Expectations The latest U.S. Producer Price Index (PPI) arrived beneath expectations for July, providing another ray of sunshine for traders that the inflation problem might be on its way to being solved. Hot on the heels of a cooler Consumer Price Index (CPI) reading, the latest report bolsters the conviction that inflation is moderating across the economy.

Driving much of the drop was a much steeper than anticipated fall in the price of gasoline which helped lower the costs of production for producers.

Falling production costs can ultimately help alleviate consumer prices further down the line. Markets have already reacted. Odds for an additional rate hike by the Fed at their July meeting tumbled, while bets on Fed policy pivots later in the year increased. A less hawkish Fed tone typically supports market prices given lower expected financing costs can loosen up liquidity in financial markets.

However, one should still look at the big picture, where Fed Chair Warsh has cautioned that one cool inflation report doesn’t signal the end of the inflationary war.

Monetary policy generally needs several months of evidence before such moves are undertaken. While prices are decelerating, policy makers would like a bit more reassurance they are sustainably moving towards a 2% inflation goal. Inflation figures are some of the most meaningful macro drivers for crypto; cooling inflation pressures reduce the need for aggressive tightening that normally benefits riskier assets.

In spite of this, however, an unexpected shock can lead to rapid revaluation. For my own part, I am keenly anticipating subsequent inflation reports even more than today’s. As long as producer and consumer prices continue to trend lower in a stable macro environment, markets may become a more agreeable place for risk assets in both stocks and cryptos.

Do you believe that the newest PPI report indicates the onset of an extended deflation, or is it too early to see any change from long-term Fed policy?

‍#Inflation #GateSquare