Core and Supercore Inflation Signals: A Red Flag for Investors
July’s inflation data didn’t just surprise on the surface—it revealed a deeper, more persistent price pressure beneath the headline numbers. The core Producer Price Index (PPI), which excludes volatile food and energy prices, surged by 0.9%, tripling the consensus forecast. Even more concerning was the supercore measure, stripping out food, energy, and trade margins, which jumped 0.6%—its sharpest monthly increase in over two years. This supercore metric is especially critical as the Federal Reserve closely monitors it to gauge “sticky” inflation in the service sector, which historically proves harder to tame.
Why This Matters: The Services Sector is Driving Inflation
Digging deeper, the inflation uptick is largely fueled by services, with final demand services prices rising 1.1%—the strongest monthly gain since March 2022. Trade margins, particularly in machinery and equipment wholesaling, surged 2.0%, while traveler accommodation and securities brokerage services also contributed to the inflationary momentum. This broad-based surge in service costs signals a shift from transient goods price shocks to more entrenched inflationary pressures.
For investors, this shift is critical. Service sector inflation tends to be stickier because it’s linked to wages and rents—costs that don’t easily revert once raised. Unlike goods prices, which can fluctuate with supply chain improvements, service prices reflect underlying economic conditions like labor market tightness and consumer demand resilience. This means inflation could linger longer than many expect, complicating the Federal Reserve’s path to normalization.
Policy Implications: September Rate Cut Looks Increasingly Unlikely
Given these robust PPI readings across headline, core, and supercore categories, the Federal Reserve’s anticipated rate cut in September now appears premature. While one data point doesn’t dictate policy, these inflation signals contradict the recent market optimism for easing monetary conditions soon.
If upcoming Consumer Price Index (CPI) and employment reports echo this strength, investors should brace for a “higher-for-longer” interest rate environment. This scenario could pressure bond markets and elevate borrowing costs, impacting sectors sensitive to interest rates such as real estate and technology.
What Should Investors and Advisors Do Differently?
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Reassess Duration Risks in Fixed Income: With the Fed likely to hold rates higher for longer, long-duration bonds face increased vulnerability. Investors should consider shortening duration and exploring inflation-protected securities like TIPS to shield portfolios.
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Focus on Inflation-Resilient Sectors: Sectors such as energy, consumer staples, and select industrials historically perform better amid persistent inflation. Additionally, companies with strong pricing power in the service sector—think healthcare or financial services—may offer better earnings stability.
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Monitor Wage Trends and Labor Market Data: Since service inflation ties closely to wages, tracking labor market tightness and wage growth can provide early signals of inflation persistence or easing.
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Prepare for Volatility Around Fed Meetings: Market expectations for rate moves may shift rapidly as new inflation and employment data arrive. Advisors should communicate this uncertainty to clients and emphasize disciplined, long-term strategies over reactionary moves.
Unique Insight: The Hidden Impact on Small Business Lending
A less discussed consequence of sustained supercore inflation is its impact on small business lending. According to the Federal Reserve’s Small Business Credit Survey, borrowing costs have already risen sharply, squeezing margins for many service-oriented small businesses. If the Fed maintains higher rates, expect tighter credit conditions that could slow growth in this vital economic segment—something investors should watch closely.
Looking Ahead: What’s Next?
Keep a close eye on next week’s CPI and employment reports. Should these confirm the PPI’s message, the Fed’s September meeting could mark a pivotal moment where the market fully embraces a prolonged restrictive policy stance. For investors, this means recalibrating portfolios for a world where inflation is less transitory and interest rates remain elevated longer than previously priced in.
In sum, the July inflation data is a wake-up call. It’s not just about headline numbers anymore—underlying price pressures in services are flashing warning signs that demand a strategic rethink. At Extreme Investor Network, we believe the best investor outcomes come from anticipating these shifts early and adapting with precision. Stay tuned for our ongoing analysis as this inflation story unfolds.
Source: PPI Surges 0.9% in July, Shaking Fed Rate Cut Hopes and Rattling Bond Markets