Surprise Drop in U.S. Wholesale Prices in August Raises Pressure on Fed to Cut Rates

Wholesale prices unexpectedly ticked down in August for the first time in four months, further bolstering the case for the Federal Reserve to cut interest rates this year. 

The product price index (PPI), which measures inflation in the supply chain before goods and services reach consumers, decreased 0.1% last month, after July’s downwardly revised increase of 0.7%, according to the latest report from the Bureau of Labor Statistics released on Wednesday. 

On an unadjusted basis, producer prices increased 2.6% from a year ago.

The core PPI, which excludes volatile food and energy prices, saw a 0.3% increase in August and was up 2.8% compared to the same period in 2024.

The August figures came in below economists' forecasts predicting that President Donald Trump’s tariffs on foreign imports would drive up wholesale prices.

The report suggests that companies may be choosing to absorb some of the added tariff-related costs rather than passing them on to the consumers—and risking driving them away—at a time of economic uncertainty. 

"While many tariffs went into effect in August, these have likely affected costs since they were announced in April, and this figure has seesawed month to month since then," explains Realtor.com® Chief Economist Danielle Hale. "Put simply, in August, wholesalers and retailers saw gross margins shrink, which suggests companies did not pass on all cost increases."

Wholesale services prices dropped 0.2% compared to July, with the decline being partly attributed to a 1.7% dip in prices for trade services.

Three-quarters of the monthly decrease in services prices could be traced to a 3.9% plunge in margins for machinery and vehicle wholesaling, according to the report.

According to the BLS release, a 2.3% surge in tobacco product costs was a "major factor" in the monthly rise in the goods index.

Why do wholesale prices matter?

Economists keep a close watch on the PPI because some of its components, including portfolio management services, health care, and airfares, feed into the Federal Reserve's preferred inflation metric: the personal consumption expenditures price index. In August, those measures delivered mixed results.

The easing in wholesale prices increases the likelihood that the Fed will proceed with its widely anticipated interest rate cut next week, although Hale notes that due to its volatility, PPI is not a particularly reliable yardstick.

"Nonetheless, the drop in producer prices is an encouraging signal and much better than seeing a jump," she says. "The Fed's inflation target is consumer prices, and some components of the PPI are similar and can be a good indicator of target inflation as [is] the [consumer price index] due out tomorrow."

The release of the latest consumer price data on Thursday by the Labor Department promises to offer new information on the impact of the Trump tariffs. 

Economists expect the report to show that consumer price inflation experienced an uptick of 0.3% from July and 2.9% year over year. 

Bleak economic data signals looming rate cut

On Tuesday, the Labor Department issued a bombshell report revealing that U.S. employers had created 911,000 fewer jobs than originally tallied in the 12 months before March 2025, contributing to the emerging narrative that the economy is not as solid as previously thought.

The Fed under Chair Jerome Powell has maintained a restrictive policy rate, which is high enough to slow economic activity to prevent runaway inflation.

"With a cooling labor market, the Fed is likely to cut its policy rate, to move it toward a more neutral position," says Hale.

Trump has been persistently calling on the Fed to cut its benchmark rate and publicly accusing Powell of dragging his feet on the issue, earning him the moniker "Too Late."

 "Just out: No inflation!!! ‘Too Late’ must lower the RATE, BIG, right now," Trump wrote on Truth Social after the PPI report's release on Wednesday. "Powell is a total disaster, who doesn't have a clue."

The Federal Reserve’s Open Market Committee, the central bank's policymaking body, is expected to cut the key federal funds rate by a quarter-point, down from its current range of 4.25% to 4.5%, during its next meeting on Sept. 17.

While the Fed does not directly set mortgage rates, its interest rate decisions affect borrowing costs for banks and Treasury bond yields.

Mortgage rates have been retreating in recent weeks in anticipation of Fed rate cuts, with the average 30-year mortgage rate hitting an 11-month low of 6.5% last week, according to Freddie Mac.

"This means that the benefit from the rate cut is largely priced into mortgage rates, and additional mortgage rate drops are only likely if we see evidence that the Fed is going to cut faster than the market currently expects," says Hale.