US inflation reaccelerates as producer prices surge.
U.S. producer prices surged in September, surpassing market estimates, driven by a rise in energy and food products, according to the latest data from the Bureau of Labor Statistics (BLS) released on Oct. 11.
The producer price index (PPI) for final demand increased by 0.5 percent, exceeding the consensus estimate of 0.3 percent. Although it eased from the previous month’s 0.7 percent rise, it still outperformed expectations. The annual PPI climbed to 2.2 percent, the highest since April and above economists’ forecast of 1.6 percent.
Goods prices soared by 0.9 percent, primarily driven by a 5.4 percent spike in gasoline costs, which accounted for over 40 percent of the increase. Prices for jet fuel, diesel fuel, and electric power also surged. Meanwhile, food costs rose by 0.9 percent, with processed young chicken and meat experiencing significant price hikes. However, prices for fresh and dry vegetables plummeted by nearly 14 percent.
Services prices edged up by 0.3 percent, with bank deposit services experiencing a significant 13.9 percent spike. Costs also surged for various products, including machinery, equipment, application software publishing, accommodation services, and supplies wholesaling.
Excluding energy and food components, core producer prices jumped by 0.3 percent from August to September, reaching a year-over-year increase of 2.7 percent. Both readings exceeded market projections of 0.2 percent and 2.3 percent, respectively.
BLS statisticians revised producer prices higher, with the annual PPI adjusted to 2 percent in August from 1.6 percent, and the core PPI revised to 2.5 percent from 2.2 percent. These revisions were dated back to May.
Overall, wholesale prices have increased by approximately 18 percent since January 2021.
Market analysts closely monitor the PPI as it often serves as a precursor to the consumer price index (CPI). The PPI reflects changes in prices received by domestic producers, while the CPI measures price adjustments paid by consumers.
The annual inflation rate will be released on Oct. 12. The Federal Reserve Bank of Cleveland’s Inflation Nowcasting expects the CPI to remain flat at 3.7 percent and increase by 0.4 percent month-over-month. Core CPI is anticipated to reach 4.2 percent year-over-year and 0.4 percent month-over-month.
The latest PPI reading highlights the challenge of taming inflation, according to Torsten Slok, chief economist at Apollo Global Management, who stated in an interview with Bloomberg TV.
Stubborn Inflation and the Fed
Despite increasing evidence of inflation reacceleration, global financial markets believe that the Federal Reserve has finished raising interest rates.
According to the CME FedWatch Tool, the futures market indicates a rate pause at the November and December Federal Open Market Committee (FOMC) policy meetings.
Last month, the U.S. central bank maintained the benchmark fed funds rate (FFR) within a target range of 5.25 to 5.5 percent. However, the Federal Reserve has not ruled out one more rate hike before the year ends to combat persistent inflation.
Fed Chair Jerome Powell stated at a post-FOMC press conference, “We have come very far, very fast in the rate increases that we’ve made. I think it was important at the beginning that we move quickly, and we did. As we get closer to the rate that we think—the stance of monetary policy that we think—is appropriate to bring inflation down to 2 percent over time, the risks become more two-sided.”
Since March 2022, the FOMC has raised rates 11 times, totaling 500 basis points.
The Summary of Economic Projections suggests that monetary policymakers anticipate one more rate increase this year, which would raise the median FFR to 5.6 percent.
Several central bank officials have indicated that interest rates are now sufficiently high, and further rate hikes may no longer be necessary. Minneapolis Fed Bank President Neel Kashkari pointed to higher Treasury yields as a potential factor.
“It’s certainly possible that higher long-term yields may do some of the work for us in terms of bringing inflation back down,” Kashkari stated during a Minot State University town hall event on Oct. 10. “But if those higher long-term yields are higher because their expectations about what we’re going to do have changed, then we might actually need to follow through on their expectations in order to maintain those yields.”
Kashkari described the recent acceleration in Treasury yields as ”perplexing,” suggesting that it could be driven by growing economic optimism or concerns about soaring U.S. government borrowing.
Despite a retreat in the U.S. bond market this week, Treasury yields recently reached their highest levels in 16 years. The 30-year Treasury temporarily surpassed 5 percent following the hotter-than-expected September jobs report, marking the first time since August 2007.
Fed Gov. Christopher Waller also believes that tighter financial markets could help slow the economy and alleviate inflation pressures. However, the Atlanta Fed GDPNow Model estimates a robust 5.1 percent growth rate in the third quarter.
What were the primary factors driving the increase in producer prices in September?
By 0.2 percent in September, following a 0.3 percent rise in August. The increase was primarily driven by higher prices for hotel accommodation, which rose by 6.6 percent, the largest gain since July 2021. Prices for airline passenger services also surged by 4.0 percent, reflecting the ongoing recovery in travel demand. However, prices for physician care and outpatient hospital services declined during the month.
The rise in producer prices can be attributed to various factors. Firstly, energy costs continued to increase, with gasoline prices seeing a significant spike. This can be attributed to the ongoing supply chain disruptions and rising global energy demand. Additionally, food prices witnessed a notable increase, driven by higher costs for processed young chicken and meat. However, prices for fresh and dry vegetables experienced a significant decline.
The increase in producer prices is a concerning indicator for inflationary pressures. Producers may attempt to pass on the higher input costs to consumers, leading to an increase in consumer prices. This, in turn, may impact consumers’ purchasing power and contribute to overall inflationary pressures in the economy.
Rising producer prices also have implications for the Federal Reserve’s monetary policy. The central bank closely monitors inflation indicators to determine the appropriate course of action. If inflation continues to accelerate, the Federal Reserve may consider raising interest rates to curb inflationary pressures. However, any interest rate hikes could also have implications for economic growth and borrowing costs.
Economists and analysts will continue to closely monitor producer prices and inflation in the coming months. Any sustained increase in prices could have broader implications for the economy and financial markets. It is crucial for policymakers to strike a balance between supporting economic recovery and managing inflationary pressures.
In conclusion, U.S. producer prices surged in September, surpassing market estimates. The increase was driven by higher prices for energy and food products. While this may reflect temporary supply chain disruptions and rising global demand, it also raises concerns about inflationary pressures. Policymakers and economists will closely monitor these developments as they navigate the path to economic recovery and price stability.
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