US PPI Preview: Will Tariff Inflation Derail the Stock Market?
US PPI Preview: Will Tariff Inflation Derail the Stock Market?
By:Ilya Spivak
Can stocks hold up if tariffs costs push up inflation, putting the markets’ Fed rate cut hopes in danger?
- Stocks anxiously wait for US inflation data to inform Fed rate expectations
- A cut this month is fully priced in, with speculation focused on what’s next
- PPI data may sour sentiment if tariffs make wholesale inflation spike again
Stock markets idling in familiar territory as traders prepare for back-to-back releases of US inflation data setting the stage for next week’s much-anticipated monetary policy announcement from the Federal Reserve. The bellwether S&P 500 has narrowly erased the loss sustained after last week’s dismal US jobs report to land at a familiar four-week range top.
First up on the menu will be August’s producer price index (PPI) report. It is expected to show that wholesale inflation slowed last month. A monthly uptick of 0.3% would a step down after a blistering 0.9% previously. The headline year-on-year rate is seen holding unchanged at a five-month high of 3.3%.
US PPI data: will Trump tariffs drive another spike in prices?
July’s PPI report showed that wholesalers across the supply chain have moved to pass higher prices from the Trump administration’s new levies along to consumers, having tried to insulate them earlier in the year. It posted the largest one-month increase since June 2022 as margins clocked in the biggest jump since March of that year.
The message was clear enough: companies are now raising prices for consumers to offset higher input costs. This marked a key change from data recorded earlier in the year showing wholesalers absorbing tariff-related price hikes to protect consumer demand. Now, firms seem resigned to pushing inflation along to retail customers.
Meanwhile, gross domestic product (GDP) data has shown that another check on tariff-linked inflation is also breaking down. Companies gorged on imports in the first quarter to build up stockpiles of goods at pre-tariff prices. This helped keep costs in check earlier in the year. The process began to reverse in the second quarter.
Inflation data may spook stocks before the Fed’s big policy update
As it stands, the markets have fully priced in at least a 25-basis-point (bps) rate cut when the Federal Open Market Committee (FOMC) convenes next week. Benchmark Fed Funds futures imply the probability of that outcome at 91.8%. The likelihood of a jumbo-sized 50bps reduction stands at 8.2%.
With this month’s Fed move looking like a foregone conclusion, what policy officials project thereafter is likely to take center stage. The markets and central bank officials are increasingly at odds on this front. Traders are pricing in 76bps in rate cuts for 2026, while FOMC members have penciled in just 25bps.
If August’s PPI figures register hotter than expected as tariff-linked inflation pressure continues to work its way into the economy, the markets may conclude that it is they that will be forced to rethink what happens next and pivot in the Fed’s direction, rather than the other way around. That may bode ill for stock markets but boost the US dollar.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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