US producer prices rose moderately in October, but inflation at the factory gate posted its largest annual gain in four years, supporting the view that the Federal Reserve could continue raising interest rates after next month’s widely expected increase.
Despite the better-than-expected monthly reading reported by the Labor Department on Friday, there were more signs of inflation broadening out beyond energy goods, with food prices increasing by the most in eight months as expensive diesel raised transportation costs. Prices of goods excluding food and energy logged their biggest gain since May.
“There is no silver lining in the report,” said Christopher Rupkey, chief economist at FWDBONDS. “It looks like consumers will be on the hook for a fresh burst of consumer inflation. Everywhere you look inflation is pushing forward and making the affordability crisis for Americans that much harder.”
The Producer Price Index for final demand rose 0.3% last month after an upwardly revised 1.4% surge in September, the Labor Department’s Bureau of Labor Statistics said. Economists polled by Reuters had forecast the PPI climbing 0.4% after a previously reported 1.3% jump in September.
The PPI shot up 6.5% year-over-year in October, the largest annual gain since November 2022, after advancing 6.3% in September.
The report followed news this week of a stronger-than-expected increase in consumer prices in October.
Producer prices over the month were lifted by a 0.5% rise in goods. Food prices jumped 1.3%, driven by fresh and dry vegetables, chickens, turkeys and roasted coffee. Prices for basic organic chemicals increased 3.9%. Energy prices dipped 0.1%, amid a 7.9% decline in diesel fuel. Still, diesel fuel soared 115.2% on a year-over-year basis in October.
Excluding food and energy, producer goods prices increased 0.5%. These so-called core goods prices accounted for more than 60% of the rise in overall producer goods last month. Goods prices advanced 10.2% in the 12 months through October, the biggest gain in four years.
US stocks opened higher. The dollar was little changed against a basket of currencies. US Treasury yields fell.
Transportation costs rise
Services increased 0.2% after accelerating 1.0% in September. These prices have now risen for five straight months. A 2.0% increase in transportation and warehousing services costs, mostly freight transportation by road, accounted for three quarters of the rise in services inflation. The transportation of freight by trucks jumped 3.9%.
There were also increases in the costs of fuels and lubricants retailing, health, beauty and optical goods retailing as well as food and alcohol wholesaling and hospital outpatient care. Hotel and motel room prices increased 2.5%, but airfares dropped 1.2%.
Airfares, hotel and motel rooms are among the key components that go into the calculation of the Personal Consumption Expenditures price indexes, the inflation measures tracked by the central bank for its 2% target. With the PPI and CPI data in hand, economists estimated that core PCE inflation rose 0.3% in October after increasing by the same margin in September.
In the 12 months through October, they forecast core PCE inflation advancing 3.2% after rising 3.1% in September.
Strong consumer inflation readings together with comments from US central bank Governor Christopher Waller have left financial markets wavering between pricing in a 25-basis-point rate hike in December and leaving room for a half-a-percentage-point increase. Financial markets anticipated another increase in borrowing costs in January, CME’s FedWatch tool showed.
The Fed left its benchmark overnight interest rate in the 3.75%-4.00% range last month.
“We expect a hotter increase for the PCE price indices as well,” said Ben Ayers, senior economist at Nationwide. “Lingering impacts from the spike in fuel prices could linger into 2027, warranting further tightening by the Fed to limit second- and third-order inflation impacts.”
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