September PPI Report Will Concern The Fed

The September Producer Price Index (PPI) data will not be well received at the U.S. Federal Reserve (Fed) as they consider plans to set interest rates for the Fed’s upcoming November 2 interest rate decision. After a lull in prices due to falling energy costs in July and August, prices rose 0.4% in September on a month-on-month basis. This isn’t completely unexpected as nowcasts are suggesting a pick-up in inflation, but it’s not the data the Fed wants to see.

Above The Fed’s Target

If that 0.4% month-on-month rise were to happen each month, it would translate to just under 5% year-on-year inflation. That’s well ahead of the Fed’s 2% inflation goal. Still, inflation may be trending lower than the peak inflation we’ve seen over the past 12 months. We may have seen peak annual PPI inflation for the U.S. in June. Nonetheless, the Fed wants to see inflation fall faster.

Energy Costs

Unlike recent reports, energy was less of a driving factor, producer prices rose at the same rate when food, energy and trade services are stripped out. This month hotel costs and vegetables were among the products and services seeing the more impactful jumps in prices. There is also a concern that with the recent OPEC+ decision to cut output energy prices, the price of oil has risen off late September lows. That could nudge up October inflation if sustained.

Inflation In Services

Another concern is inflation in services. Price rises in services, as opposed to goods, may be more representative of underlying inflation in the U.S. economy. Prices for goods can swing due to volatile input costs. Prices for services rose 0.4% month-on-month. This may suggest some persistent inflation in the U.S. economy. That’s exactly what the Fed is looking to avoid.

The November Rate Decision

We’ll see additional economic data before the Fed meets to set interest rates on November 1-2, with the decision announcement on November 2. So far the data hasn’t looked good. Yes, inflation is coming down from peak levels, but is not yet close to the Fed’s 2% target, and there are some potential signs that inflation may be more entrenched in the U.S. economy than the Fed hopes.

At the same time, the jobs market is holding up well, so the Fed is less worried currently about hurting American jobs by raising rates, even if signs of a potential recession are there. If anything, current data is increasing the markets conviction that we’ll see a 0.75 percentage point hike at the next Fed meeting.

However, the real uncertainty is what the Fed will do in 2023. If inflation remains sticky, the Fed may be tempted to make more rate hikes next year than that market currently anticipates.