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• US producer prices surged to a five-month high.
• Core producer prices moderated compared to August.
• The CME FedWatch Tool was little impacted post the PPI data release.

Earlier today, the US Bureau of Labor Statistics (BLS) published its much-awaited Producer Price Index (PPI) data.

The PPI for September surged to 2.2% YoY, well above a forecast of 1.6% YoY as per Investing.com and higher than the previous month’s 2.0% YoY.

This marked the third consecutive month of rising producer prices, reaching the highest increase since April 2023 which was registered at 2.3% YoY.

This may prove to be a worrying sign ahead of the November 1 announcement of the Federal Reserve in light of the sharp increase in nonfarm payrolls earlier this month.

However, September’s PPI reading remained below the January – August average of 2.475%.

Source: TradingEconomics.com

MoM data

On a monthly basis, the PPI eased to 0.5% MoM, cooling from the previous month’s rise to 0.6% MoM.

This was higher than market expectations of 0.3%, and well above the monthly average of January -August of 0.15%.

Final demand, goods and services 

Final demand index for goods was up by 0.9% MoM, easing considerably from 2.0% in August 2023.

The key contributor was a jump of 13.9% in the index for deposit services (partial).

The overall moderation was led by energy goods which registered a rise of 3.3%, compared to 10.3% in August.

However, the BLS noted,

Over 40 percent of the September increase in prices for final demand goods can be traced to a 5.4-percent rise in the index for gasoline.

Food, on the other hand, which had witnessed a contraction of 0.5% during the last month, saw a sharp turnaround and increased by 0.9% in September.

Services

The final demand index for services edged higher to 0.3% compared to 0.2% in the previous month.

The trade component increased to 0.5% from 0.2% in August but remained well below July’s 1.6%, which also happens to be the high-water mark for 2023.

Transportation and warehousing, on the other hand, saw a second consecutive month of contraction from (-)0.3% in August to (-)0.4% in the September report.

In September, prices for goods outpaced services by 0.9% to 0.3%, a trend that carried forward from August where they measured 2.0% and 0.2%, respectively.

The last time the increase in goods prices outpaced services was January 2023 when they measured in at 1.3% and 0.0%, respectively.

Core producer inflation

Core prices (which exclude volatile components such as food and energy) were higher by 2.8% YoY, moderating from 2.9% in the previous report.

This was significantly higher than market estimates of 2.3% as reported by Investing.com.

The month of August was revised higher from 2.5% to 2.9%, suggesting the possibility of hardening in annualized core PPI.

For the month, core PPI was up by 0.2%, as it was in August, but remained below the 0.3% increase in July.

Monetary policy 

The November announcement shall mark the penultimate rate action before the end of the year.

Today’s PPI and tomorrow’s CPI are the final key pieces of inflation data that are to be published prior to the Fed’s November meeting.

These shall play a key role in determining the coming inflation projections and interest rate trajectory till the end of the year.

Despite the PPI being hotter than anticipated and the Fed’s hawkish narrative earlier in the year, markets appear relatively unconvinced that policy rates will be heading higher this year.

Source: CME FedWatch Tool

This expectation will likely only alter if retail inflation surprises significantly to the upside, particularly given the moderation in core inflation and ongoing geopolitical developments.

CPI expectations and Fed minutes

Ahead of tomorrow’s CPI release, markets expect a moderation from 3.7% YoY in August to 3.6% YoY.

The August report had seen a significant jump from 3.2% YoY in July 2023.  

Final words

The PPI surprised to the upside, rising by 2.2% YoY, while core inflation moderated to 2.8% YoY.

Goods inflation outpaced services inflation for the second month in a row, counter to the trajectory since January 2023.

Both PPI and core PPI cooled from the previous month.

The stability of core inflation will likely contribute to the Fed’s decision to leave rates unchanged in its November meeting.

The markets will be closely watching tomorrow’s CPI numbers as well as the Fed’s FOMC minutes release later today.

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