PPI inflation surges in August, fueling Fed rate hike odds

Inflation across the supply chain surged higher in August, matching consensus forecasts but failing to display much progress toward disinflation, boosting the likelihood of an interest rate hike when Federal Reserve policymakers meet next week.

The producer price index (PPI) jumped 0.4% last month compared to a revised 0.1% increase in July, the U.S. Bureau of Labor Statistics (BLS) said Thursday. That sent the index 5.4% higher than a year ago in August compared to 4.8% annual growth the previous month.

Economists surveyed by Reuters and Dow Jones had forecast a monthly PPI increase of 0.4% but slightly lower annual growth of 5.3%.

Core PPI, which excludes volatile prices for food, energy and trade margins, advanced 0.3% in August compared to 0.4% growth in July, while matching July’s annual growth rate of 4.7%.

Noting that progress toward achieving the Fed’s stated 2% inflation target had stalled over the summer, Fed Chair Kevin Warsh cautioned markets in late August that the U.S. central bank may have “work to do” if inflation trends do not move consistently toward target.

Rising PPI inflation in August would appear to reinforce that warning, underscored by the fact that data collected for the report only runs through Aug. 11, and therefore does not reflect recent weeks of rising oil prices and bond market volatility.

The component index for final demand goods drove the overall increase in last month’s wholesale inflation, advancing 1.1% against just a 0.1% rise in prices for final demand services. The jump in goods prices followed two consecutive months of declines, the BLS said.

More specifically, the BLS reported that more than three-quarters of August’s increase can be linked to prices for final demand energy, which rose 4.2% over the month.

The index tracking prices for diesel fuel — relied on by companies in the construction, agriculture and commercial trucking industries — spiked more than 24% amid ongoing fallout from the Iran war, which returned to active hostilities in mid-July following the breakdown of ceasefire negotiations.

Amid that escalation, oil prices have moved back above $100 per barrel this week, leading investors to increasingly price in higher inflation — and thus higher interest rates — for longer.

Treasury yields, rate hike odds rise

Following the August PPI release, investor odds that Fed policymakers will raise the federal funds rate by a quarter-point when they meet next week rose to around 70% from 60% a day prior, according to CME FedWatch, which tracks fed funds futures prices. The benchmark rate has been in its current range of 3.5% to 3.75% since last December.

As the likelihood of a September rate hike climbed Thursday morning, so did yields across the Treasury curve.

Returns on 2-year Treasury bills exceeded 4.5% as of 10 a.m. EDT, reflecting expectations of higher short-term rates ensuing from a Fed rate hike. Meanwhile, yields on 10-year Treasury bonds to which mortgage rates are benchmarked moved within eight basis points of a key 5% threshold, its highest level since October 2023.

Thursday’s PPI print is only the first of a pair of closely watched inflation readings to be published this week, with the consumer price index due out Friday. The CPI report for July had met expectations but still showed annual inflation of 3.4% compared to 3.5% annual growth in June.

As PPI goods prices reversed two months of declines, services prices rose for the third consecutive month in August, underscoring investor concerns of energy impacts bleeding into other areas of the economy.

Transportation and warehousing services, for example, rose 2.3% last month compared to a 1.1% contraction in July, reversing two consecutive months of declines. Truck transportation of freight saw a 2% gain as indexes for airline passenger services, legal services and hospital inpatient care also increased.