Cooling Inflation Signals a New Path for the Fed

producer prices for the latest month rolling in cooler than expected.

This does come on the heels of cooler consumer prices last month.

Now investors are digesting additional quarterly results from big banks this morning with some more record profit on the back of strong equity trading revenues and activity.

Meanwhile, that Kevin marking the two of testimony on Capitol Hill today and all of this does come as energy reversal.

Bloom outside the fragile Middle East ceasefire.

Well joining me this morning to weigh in is Jeff Roach, chief economist at LPL Financial.

Jeff, good morning.

Thank you so much for joining me.

Well, we got both the PPI as well as CPI figures, but we do have to keep in mind that there's still uncertainty regarding the geopolitical situation in the Middle East.

So what are the key takeaways and how are you factoring in uncertainty when it comes to the conflict?

Well, I think there are a couple of key takeaways from this morning's report, and I think, uh, front and center is the fact that, you know, we know that June had a decline in energy prices, uh, so that's not the, the, the main takeaway.

I think I, I find it quite interesting that the previous month, the month of May, had a downward revision in producer costs.

So you think about the pipeline of inflation hitting consumers, uh, the kind of the first step of that would be what's the producer paying for these inputs.

And we see, uh, we see outright declines in some of these core services.

I also do a double click and look at what is, uh, inputted into capital investment.

So you think about that AI build out and the pressure on prices because of that demand.

I think this category is very important.

So the capital investment categories actually had two consecutive declines in prices month of May decline, June declines.

So I think what that tells me is that as we go into Q3 and then Q4, we have to have a little bit of a patience as we as we wait this uncertainty out, but I think we end the year in 2026 where inflation is actually approaching the Fed's target, not hitting the Fed's target, but at least going in that direction again.

Yes, and I do want to expand on this, especially since today does mark day for the Fed to speak in the nation's capital today.

So given what we're seeing in inflation as well as your expectations for rates, where do we stand right now and what are some of the risks?

I think one of the risks here now is that the market is expecting a rate hike, and it's very possible that there's not going to be a rate hike and the Fed is on hold for the next few meetings.

There's still a little bit of a wild card saying when they actually take an action, but it's very possible that the market has it wrong.

They don't hike in 2026.

Now granted, the chair is talking very aggressively to lawmakers about his commitment.

To beat inflation, uh, what I found interesting from yesterday's testimony is he's still very high level.

This is kind of the 50,000 ft view.

Uh, Chair Warsh is not talking about specifics, the tactical ways to implement policy.

Part of that is on purpose because he has 5 new task forces made up of several key individuals that are experts in their field.

And so I think the chair is waiting to hear a little bit of those recommendations before he gets into the details and the tactics of battling inflation.

So he's speaking hawkishly, but I think in the next several meetings the Fed actually does hold rather than hike.

Yes, a lot to keep our eyes on, especially as we continue to listen to Worsch's testimony before the Senate Banking Committee today.

But you mentioned what we're seeing in the finer details of these inflation data points and of course for the American consumer we're all watching.

Global supply chains.

So given what we're seeing right now in the Middle East and uncertainty regarding the Strait of Hormuz as we head into the rest of this year and as we approach the holiday season, what does it actually mean for the American consumer when it comes to potential disruptions?

Right, well, eventually we, we need to ultimately we need to have a decisive resolution and that will fix a lot of the uncertainty.

But in the near term, consumers will have to work through higher prices at the pump.

We've seen a little bit of a respite here in recent weeks because of uh the, the recent improvements in in shipping, but that certainly was very short lived.

And as you mentioned earlier, the renewed attacks there in the Middle East, so consumers have to be patient.

I think that in the near term there will be some pressure points, particularly on gasoline, but I think once we hit Labor Day and that decisive resolution in the Middle East, we will be able to at least enter into Q4 in a much better position.

And finally, Jeff, excuse me, before I let you go, of course we're keeping an eye on WTI as well as rent prices, and we are looking at a move higher, although we are well off the highs we've seen earlier this year.

So what does it mean regarding paying at the pump for American consumers moving forward?

Well, of course retail prices are ultimately traced back to how rent and crude are, are trading in the markets.

I think the fact that we have not seen, uh, West Texas Intermediate get back into the mid or upper 80s, that is certainly encouraging.

Now, certainly we did have a recent spike back up to the mid and upper 70s.

Uh, per barrel, uh, but I think at this point, you know, I think prices are contained particularly because we have, uh, opportunities to ramp up domestic production and that should offset some of the pressures that consumers will see, uh, especially retail prices of those, uh, prices at the pump.

And very quickly Jeff, before I let you go, of course we're paying attention to what's happening in terms of artificial intelligence, the impact on growth, as well as the labor market here.

So when it comes to the other side of the Fed's mandate or equation in addition to inflation, what are you seeing in the labor market right now?

Well, that's right.

In addition to their mandate for price stability, the other mandate is full employment.

At this point we are at full employment.

We're in a low fire, low hire, low quit kind of scenario.

I think what's interesting though is we've seen in recent reports a number of folks that were.

At least were counted as unemployed have dropped out of the labor force altogether.

That's artificially suppressing the unemployment number.

It's very possible that the unemployment rate is a little bit higher than the headline reported, but at this point, the labor market is holding steady.

There's a fairly healthy pace of hiring, particularly in the services category, and I think that that portends a pretty decent labor market for the rest of the year.

Well, Jeff, always great talking to you.

Thank you so much for weighing in on the latest economic data releases.

Appreciate your time as well as all of your insights.

Thank you.