By Lucia Mutikani
WASHINGTON, Oct 15 (Reuters) – US producer prices increased by the most in 4-1/2 years in September amid rising costs for goods and services, the latest indication of inflation broadening out beyond energy products.
The report from the Labor Department on Thursday also showed fairly large rises last month in key components that go into the calculation of the main inflation measures tracked by the Federal Reserve for its 2% target, leading some economists to still anticipate another interest rate increase this month.
Financial markets, however, continued to expect the next rate hike only in December. The government on Wednesday reported a broad increase in consumer prices in September. Inflation is being driven by the dragging US-Israeli war with Iran, which is keeping oil prices elevated.
Though other data on Thursday showed a stronger-than-expected increase in retail sales last month, that was mostly because consumers paid more for gasoline. The underlying trend in retail sales slowed, consistent with economists’ expectations for softer consumer spending growth in the fourth quarter.
Inflation is outpacing wages, which have slowed amid tepid hiring, straining finances for consumers, particularly those in the lower part of what economists call a K-shaped economy.
“Today’s data reinforce a challenging economic crosscurrent: inflation is heating up, the consumer is still spending but with less underlying momentum and the labor market appears frozen rather than broken,” said Chris Osmond, chief investment officer at Fifth Third Wealth Advisors.
“For the Fed, that is an increasingly uncomfortable combination. A pause remains defensible, but the cost of waiting rises if inflation fails to cool.”
The Producer Price Index for final demand jumped 1.3% last month, the largest gain since March 2022, after an upwardly revised 0.5% rise in August, the Labor Department’s Bureau of Labor Statistics said.
Economists polled by Reuters had forecast the PPI increasing 0.5% after a previously reported 0.4% gain in August. In the 12 months through September, the PPI soared 6.3%, the biggest rise since December 2022. That followed a 5.6% advance in August.
Producer goods prices increased 2.6%, the largest increase since the government started tracking the series in December 2009. A 10.8% surge in energy prices accounted for more than 80% of the broad-based rise in goods prices. Gasoline prices rose 20.3%. Diesel fuel prices increased 21% and soared 115.2% year-on-year. Jet fuel cost more as did residential electric power.
Wholesale food prices rebounded 1.2% after declining for three straight months. Food is transported by road and rail, and last month’s jump could be an early sign of the effects of record diesel prices spilling over to the broader economy.
Fresh and dry vegetable prices vaulted 41.0%, but egg prices dropped 31.9%.
Excluding the volatile food and energy components, producer goods prices rose 0.3%. The so-called core goods gained 0.4% in August. Services prices shot up 0.8% after climbing 0.2% in August. A 1.4% surge in margins for trade services accounted for nearly half of the broad-based increase in prices.
“The change in margins is an indicator firms are facing higher prices, and could pass those costs on to consumers,” said Mark Streiber, economic analyst at FHN Financial.
TRANSPORTATION COSTS RISE
The cost of transporting freight by road increased 3.8%, while airfares jumped 5.0%, both reflecting higher oil prices. Hotel and motel room prices shot up 5.6%. The cost of legal services rose 0.3%. Airfares, hotel and motel rooms, and legal costs are among the key components that go into the calculation of the Personal Consumption Expenditures price indexes.
Economists’ estimates for the increase in September’s core PCE inflation ranged from 0.31% to 0.36%, which could round up to 0.4%. That would translate to a year-over-year rise of 3.1%. Core PCE inflation gained 0.2% in August and advanced 3.0% on a year-over-year basis.
Financial markets saw a roughly 30% chance of a rate increase at the Fed’s October 27-28 policy meeting, CME Group’s FedWatch Tool showed. The odds of a rate increase were slashed by underwhelming payroll gains in September as well as cooler-than-expected PCE inflation readings for July and August.
The Fed in September raised its overnight benchmark interest rate by 25 basis points to the 3.75%-4.00% range.
Stocks on Wall Street were trading higher. The dollar eased against a basket of currencies. US Treasury yields slipped.
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 had forecast retail sales, which are mostly goods and are not adjusted for inflation, gaining 0.3%.
Receipts at service stations surged 6.4%. Sales at auto dealerships rose 0.2%. There were also increases in receipts at furniture, electronics and appliance stores as well as online retailers.
Sales at food services and drinking places, the only services component in the report, increased 1.1%, which economists tied to spending by higher-income households.
Receipts at building material as well as sporting goods, hobby, musical instrument and book stores fell. Sales at miscellaneous store retailers dropped 3.0%.
Retail sales excluding automobiles, gasoline, building materials and food services edged up 0.1% last month after surging 1.2% in August. These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. While economists believed consumer spending grew at above a 3.0% annualized rate in the third quarter, they saw the momentum fading by year end.
“Higher gas prices are beginning to bite because, unlike earlier in the year, there’s no offset this time around from fiscal policy,” said Michael Pearce, chief US economist at Oxford Economics. “We expect … the rise in diesel prices to result in larger price hikes across a broader range of goods and services over the coming months.”
Growth estimates for the July-September quarter are around a 3.0% rate. The economy grew at a 2.2% pace in the second quarter. A third report from the Labor Department showed initial claims for state unemployment benefits rose 1,000 to a seasonally adjusted 199,000 last week, still near a 57-year low.
“Paychecks 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)
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