By Lucie Mutikani
WASHINGTON, October 15 (Reuters) – U.S. producer prices recorded their biggest rise in four and a half years in September, amid rising costs of goods and services, the latest sign of inflation extending beyond energy products.
The Labor Department’s report released Thursday also showed fairly large increases last month in key elements that go into calculating the main inflation measures tracked by the Federal Reserve for its 2% target, leading some economists to anticipate yet another interest rate hike this month.
However, financial markets continue to expect the next rate hike only in December. The government reported on Wednesday a sharp rise in consumer prices in September. “Inflation is fueled by the endless war between the United States and Israel against Iran, which keeps oil prices high.
Although other data released Thursday showed a stronger-than-expected increase in retail sales last month, that was mainly because consumers paid more for gasoline. The underlying trend in retail sales slowed, consistent with economists’ expectations for slower growth in consumer spending in the fourth quarter.
Inflation is outpacing wages, which have slowed amid tepid hiring, straining the finances of consumers, especially those at the lower end of what economists call a K-shaped economy.
“Today’s data reinforces a difficult economic tide: inflation is accelerating, consumers continue to spend but with less underlying momentum, and the job market appears frozen rather than broken,” said Chris Osmond, chief investment officer at Fifth Third Wealth Advisors.
“For the Fed, this is an increasingly uncomfortable combination. A pause remains defensible, but the cost of waiting increases if inflation fails to cool.”
The producer price index for final demand jumped 1.3% last month, the largest increase since March 2022, following an upwardly revised 0.5% increase in August, the Labor Department’s Bureau of Labor Statistics said.
Economists polled by Reuters had forecast a 0.5% rise in the PPI after a 0.4% gain previously reported in August. In the 12 months to September, the PPI rose 6.3%, the biggest rise since December 2022. This follows a 5.6% rise in August.
Prices of producer goods rose 2.6%, the largest increase since the government began tracking the series in December 2009. A 10.8% rise in energy prices accounted for more than 80% of the broad rise in goods prices. Gasoline prices increased by 20.3%. Diesel fuel prices rose 21% and climbed 115.2% year-over-year. Jet fuel costs more, as does residential electric power.
Wholesale food prices rebounded 1.2% after falling for three consecutive months. Food is transported by road and rail, and last month’s rise could be an early sign of the effects of record diesel prices rippling through the broader economy.
Prices of fresh and dried vegetables jumped 41.0%, but those of eggs fell 31.9%.
Excluding the volatile food and energy components, prices of producer goods increased by 0.3%. So-called basic goods gained 0.4% in August. Prices of services jumped 0.8% after climbing 0.2% in August. A 1.4% increase in commercial services margins accounts for almost half of the overall price increase.
“The change in margins is an indicator that companies are facing higher prices and could pass those costs on to consumers,” said Mark Streiber, an economic analyst at FHN Financial.
TRANSPORT COSTS INCREASE
The cost of transporting goods by road rose 3.8%, while airfares jumped 5.0%, both reflecting rising oil prices. Prices for hotel and motel rooms rose 5.6%. The cost of legal services increased by 0.3%. Airline tickets, hotel and motel rooms, and legal fees are among the key elements included in the calculation of price indexes for personal consumption expenditures.
Economists’ estimates for the increase in core PCE inflation in September ranged between 0.31% and 0.36%, which could round up to 0.4%. This would translate to a year-over-year increase of 3.1%. Core PCE inflation gained 0.2% in August and rose 3.0% year-on-year.
Financial markets saw about a 30% chance of a rate hike at the Fed’s Oct. 27-28 policy meeting, CME Group’s FedWatch tool showed. The odds of a rate increase were reduced by disappointing payroll gains in September as well as weaker-than-expected PCE inflation numbers for July and August.
In September, the Fed raised its benchmark overnight interest rate by 25 basis points to a range of 3.75% to 4.00%.
Stocks on Wall Street were trading higher. The dollar weakened against a basket of currencies. US Treasury yields fell.
In a separate report, the Commerce Department’s Census Bureau said retail sales rose 0.8% in September after jumping 1.3% in August. Economists forecast that retail sales, which are mostly goods and are not adjusted for inflation, would gain 0.3%.
Gasoline station revenues jumped 6.4%. Auto dealership sales increased 0.2%. Revenues at furniture, electronics and appliance stores and online retailers also increased.
Sales at food services and drinking places, the only services component in the report, rose 1.1%, which economists linked to spending by higher-income households.
Revenues from construction materials stores as well as sporting goods, leisure items, musical instruments and bookstores declined. Sales at miscellaneous retailers fell 3.0%.
Retail sales excluding automobiles, gasoline, building materials and food services edged up 0.1% last month after jumping 1.2% in August. These core retail sales correspond most closely to the consumer spending component of gross domestic product. While economists thought consumer spending grew at an annualized rate above 3.0% in the third quarter, they saw that momentum falter as the year ended.
“The rise in gasoline prices is starting to bite because, unlike earlier in the year, fiscal policy is not compensating this time,” said Michael Pearce, chief U.S. economist at Oxford Economics. “We expect… rising diesel prices will lead to larger price increases across a wider range of goods and services over the coming months.”
Growth estimates for the July-September quarter are around 3.0%. The economy grew at a rate of 2.2% in the second quarter. A third report from the Labor Department showed initial claims for state unemployment benefits rose by 1,000 to a seasonally adjusted 199,000 last week, still near a 57-year low.
“Wages may not be keeping up with inflation, but at least people are still getting them,” said Heather Long, chief economist at Navy Federal Credit Union.
(Reporting by Lucia Mutikani; editing by Andrea Ricci)
