Producer Prices Rose 1.3% in September, 6.3% Over the Year, Biggest Annual Gain Since December 2022

One day after the September consumer price index showed annual inflation at 3.7%, the Labor Department's producer price index (PPI) landed even hotter. Today, Oct. 15, the Bureau of Labor Statistics said final-demand prices rose 1.3% in September and 6.3% from a year earlier.

The monthly gain is the largest since March 2022. The annual rate is the highest since December 2022, when it hit 6.4%.

Forecasts were well short of the mark. Economists polled by Dow Jones expected 0.6% for the month and 5.5% for the year. FactSet's consensus was 0.5% and 5.3%.

August was also revised up, to a 0.5% monthly gain and a 5.6% annual rate.

Energy did most of the damage

Final-demand energy prices jumped 10.8% in the month. Over 80% of the broad-based increase traces back to energy, according to the Labor Department.

Goods prices rose 2.6%, the largest monthly increase since the index began to be calculated in 2009. Compared with a year ago, goods are up 9.8%. Half of the goods increase came from gasoline, which surged 20.3%.

The Middle East conflict, including the U.S. war with Iran, has curtailed oil supply and pushed prices higher. Food prices rose 1.2% on the month.

Services climbed 0.8% for the month and are up 4.8% from a year ago. Nearly half of that came from a 1.4% rise in trade services, which measures margins at retailers and wholesalers.

Spillover beyond the pump

Strip out food, energy and trade services and the index still rose 0.5% in September, after 0.3% in August. That measure is up 5.0% over the past year.

The broader core index, which excludes only food and energy, rose 0.7% from August to September, up sharply from 0.2% the previous month. Compared with a year ago, core prices rose 5%, up from 4.6% in August.

The BLS said almost half of September's increase in processed goods for immediate demand was connected to higher diesel fuel prices.

Wednesday's CPI report showed the same pattern at the consumer level. Overall prices rose 0.6% in September and 3.7% over twelve months. Core CPI rose 0.3% on the month and 2.6% on the year, both slightly above forecasts.

The Federal Reserve's Beige Book, released Wednesday, had the highest number of mentions of inflation-related terms on record, according to an analysis from Bespoke Investment Group. The AP notes inflation has now topped the Fed's 2% target for five and a half years.

Consumers are starting to pull back

Retail sales rose 0.8% in September, according to the Commerce Department, beating the 0.4% economists expected. That is still a slowdown from August, when sales rose by more than 1%.

Retail sales are adjusted for seasonality but not inflation. With consumer prices up 0.6% in the month, real spending was much flatter.

Excluding autos and gas stations, sales rose just 0.25%, down from about 1.1% a month earlier. That points to shoppers cutting back elsewhere to cover fuel.

The Fed's next move

Traders are now pricing in a nearly 34% chance that the Fed raises rates at its meeting later this month, up from under 18% a week earlier, according to CME's FedWatch tool.

"With a second day in a row of higher-than-expected inflation numbers, it seems the Fed will have no choice but to raise rates again this year," said Chris Zaccarelli, investing chief at Northlight Asset Management.

Bill Adams, an economist at Fifth Third Commercial Bank, said Wednesday that a hot September PPI report "could tip the balance toward a hike at the meeting."

A hike is not the base case, though. A 34% chance means the futures market still leans toward no move this month. Fed officials have said in recent weeks they are keeping an open mind and will let the data guide them.

The numbers also give the Fed a reason to weigh its options carefully. Much of the PPI jump is energy, and the measure excluding food, energy and trade services gained 0.5%, far smaller than the headline.

PPI feeds into the personal consumption expenditures index, the Fed's preferred inflation gauge. A portion of PPI data is used alongside consumer inflation figures to calculate it.

Politics and markets

The reports arrive weeks before the midterm elections, where affordability is expected to weigh heavily on voters.

Stock futures were mixed after the release. Dow futures held gains of about 0.3%, while S&P 500 and Nasdaq 100 futures were down 0.3% and 1.2%, respectively.

The Fed's rate decision later this month is the next test. If energy prices stay elevated, upcoming inflation reports will show whether the spillover into diesel-linked goods and trade margins is a one-month jump or the start of a broader trend.