For a market waiting to find out whether Fed hikes were imminent, last week’s inflation data answered in the negative. Neither the CPI nor the PPI built a case for moving in September, and by week’s end, the market had pushed expectations for the next Fed rate hike out to early 2027.
The PPI release didn’t change the narrative set forth after the CPI release. Headline PPI was unchanged on the month, while the year-over-year rate fell to 4.7% from 5.5%. Core services PPI reaccelerated after a negligible June. Notably, the increase was driven by a 6.5% jump in portfolio management fees. Because this category feeds into PCE inflation, a measure closely watched by the FOMC, it might ordinarily have raised concerns about future inflation pressure. However, markets largely dismissed the increase because a forthcoming BEA methodology change will significantly reduce the category’s influence.
The PPI index treats an increase in assets under management driven by rising markets as a price increase, so an equity rally mechanically shows up as fee inflation. Beginning with the September 30 annual update, and applied retroactively, the BEA will stop tying portfolio management fees in PCE to assets under management and instead measure them using wage growth, which lowers the correlation to equity and asset prices. Estimates suggest the methodology change could lower measured core PCE inflation by roughly 0.2 percentage points.
Markets largely looked through the portfolio management component, recognizing that the FOMC is unlikely to place much weight on a category that is about to be redefined. This contributed to the week’s broader “less hawkish” repricing.
