A closely watched measure of wholesale inflation in the US economy unexpectedly contracted in August, suggesting that tariffs are not yet passing through to American businesses and consumers.

Monthly producer price inflation was minus 0.1 per cent between July and August, defying expectations of a rise of 0.3 per cent. A measure of core producer prices also contracted by 0.1 per cent.

August’s deflation meant that annual wholesale inflation slowed from 3.4 per cent in July to 2.8 per cent last month. Economists had expected it to be 3.5 per cent.

The figures will embolden policymakers at the Federal Reserve who are poised to make their first interest rate cut of the year next week. The Fed has made no change to borrowing costs in 2025 as it has waited to see how far tariffs will impact consumer prices. Producer price inflation is an early indicator of broader inflation as businesses often pass on their higher costs to households to protect margins.

Wall Street opened higher on hopes of a series of interest rate cuts this year, pushing the S&P 500 and the Nasdaq up 0.5 per cent in morning trading. The Dow Jones Industrial Index bucked lost 0.3 per cent.

US government bonds also rallied on the figures, pushing down the yield on two-year Treasuries, which are sensitive to interest rate changes, by 0.02 percentage points to 3.53 per cent. The dollar also recovered its losses and traded up against a basket of major currencies by 0.1 per cent in early morning US trading.

Traders are maintaining a 100 per cent probability of the Fed cutting interest rates next week, with a 90 per cent probability of a quarter-point cut and a 10 per cent change of half a percentage point. Jerome Powell, chairman of the Fed, has opened the door to monetary easing after employment growth slowed for the last three months and was revised down by 911,000 in the year to March.

August’s measure of US consumer price inflation will be published on Thursday and is the final major data release before the central bank’s interest rate decision next Wednesday. Economists had expected annual inflation in August to pick up from 2.7 per cent to 2.9 per cent — above the Fed’s 2 per cent target — but the PPI figures suggest that price pressures are not growing as fast as expected despite tariff levels rising to the highest since the 1930s.

Sam Tombs, chief US economist at Pantheon, said it was “impossible to conclude from the PPI data whether CPI core goods prices rose modestly or rapidly in August. We still think consumers were hit with large price rises for imported goods in August, but we’ll know for sure tomorrow.”

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The US Bureau of Labor Statistics said trade services were the biggest drag on wholesale inflation, falling by 1.7 per cent, the weakest reading since April, and following on from a 1 per cent jump in July. Wholesale energy prices declined by 0.4 per cent last month.

Stephen Brown, deputy chief North America economist at Capital Economics, said the August PPI data suggested that “tariff effects are feeding through only slowly” to the economy. The big swing in trade services between July and August “overstates the softness of producer prices” and will not be enough to get a majority of the Fed to vote for a larger interest rate cut next week, he said.

Analysts at Citi, a US investment bank, said the August figures reflected “muted”‘ inflationary pressures. “We see nothing in this report that would dissuade Fed officials from cutting 0.25 percentage points in September and proceeding to cut 0.25 percentage points at each upcoming policy meeting”.