September PPI report will worry the Fed
September’s Producer Price Index (PPI) data will not go down well with the US Federal Reserve (Fed) as it mulls plans to set interest rates for the Fed’s forthcoming Nov. 2 interest rate decision. After a price slump due to falling energy costs in July and August, prices rose 0.4%m/m in September. This isn’t entirely unexpected as nowcasts are pointing to a pick-up in inflation, but it’s not the data the Fed wants to see.
Above the Fed’s target
If this monthly increase of 0.4% occurred each month, it would result in annual inflation of just under 5%. That’s well above the Fed’s inflation target of 2%. Still, inflation could be trending lower than the peak inflation we’ve seen over the last 12 months. We may have seen the highest annual PPI inflation for the US in June. Nonetheless, the Fed wants inflation to fall faster.
Energy costs
Contrary to recent reports, energy was less of a driver, with producer prices rising at the same rate when food, energy and trade services are factored out. This month, hotel expenses and vegetables were among the products and services that saw the larger price jumps. There is also concern that oil prices have risen from late September lows with OPEC+’s recent decision to cut energy prices. That could boost October inflation if it holds. Inflation in the service sector
Another concern is inflation in the services sector. Price increases in services as opposed to goods may be more representative of underlying inflation in the US economy. Prices for goods can fluctuate due to volatile input costs. Services prices rose 0.4% month-on-month. This could indicate continued inflation in the US economy. This is exactly what the Fed wants to avoid.
The November interest rate decision
We will see additional economic data before the Fed meets to set interest rates on November 1st and 2nd, with the announcement of the decision on November 2nd. So far the data hasn’t looked good. Yes, inflation is declining from its highs, but it’s not yet close to the Fed’s 2% target, and there are some possible signs that inflation may be more entrenched in the US economy than the Fed is hoping.
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