The Inflation Component Markets Chose to Ignore

• Headline PPI was unchanged month-over-month, with the year-over-year rate falling to 4.7% from 5.5%, building no case for a September Fed rate hike
• Portfolio management fees jumped 6.5%, but markets dismissed this increase as the BEA will stop tying these fees to assets under management and instead use wage growth starting September 30
• The BEA methodology change is estimated to lower measured core PCE inflation by roughly 0.2 percentage points when applied retroactively

Summary

Last week's inflation data significantly reduced market expectations for near-term Federal Reserve rate hikes, with the next increase now projected for early 2027 rather than September.

Key Data Points:

• Headline PPI remained unchanged month-over-month
• Year-over-year PPI declined to 4.7% from 5.5%
• Core services PPI showed reacceleration following a weak June reading
• Portfolio management fees surged 6.5%, driving the core services increase

Critical Development:

Markets largely dismissed the portfolio management fee spike due to an upcoming Bureau of Economic Analysis (BEA) methodology change. The current methodology treats rising assets under management from market gains as price increases, artificially inflating measured inflation during equity rallies.

Starting September 30, the BEA will retroactively change how portfolio management fees are calculated in the Personal Consumption Expenditures (PCE) index—the Federal Reserve's preferred inflation gauge. Instead of tying fees to assets under management, the new methodology will use wage growth, reducing correlation with asset prices. This change is estimated to lower core PCE inflation by approximately 0.2 percentage points.

Market Implications:

The market adopted a "look-through" approach to the portfolio management component, recognizing the Federal Open Market Committee (FOMC) will likely discount this category ahead of its redefinition. Combined with the broader CPI and PPI data, this contributed to a "less hawkish" repricing across markets last week, pushing back rate hike expectations substantially and suggesting a more dovish Fed policy trajectory than previously anticipated.