Wholesale inflation in August saw its strongest increase in three months, largely driven by higher energy costs amid the war with Iran – as the Federal Reserve weighs whether to raise interest rates next week.
The Producer Price Index jumped 5.4% in August over the past 12 months, up from a 4.7% pace in July and slightly above estimates of a 5.3% pace, the Bureau of Labor Statistics said Thursday. On a monthly basis, it rose 0.4%.
Core PPI – which excludes volatile food and energy prices, making it a better measure for underlying inflation trends – rose to 4.7%, up from 4.2% the previous month and also slightly above expectations of a 4.6% rise.
It’s the first of two major inflation reports this week that could influence the Fed’s decision at its Sept. 16 meeting, a crucial call that could influence the midterm elections.
Officials have been divided over whether it’s too soon to hike rates, which could stunt growth, or if inflation is hot enough to demand a quarter-point hike.
Clark Bellin, president and chief investment officer at Bellwether Wealth, said the PPI report was close enough to expectations to put all eyes on the Consumer Price Index, slated for release Friday morning. A hotter-than-expected CPI could push the Fed to issue its first interest-rate hike in three years.
“If we see a relatively benign CPI report on Friday, the Fed may take a pause on rates this time around and allow more time to pass to process incoming economic data,” Bellin said in a note Thursday.
But he also warned that a hotter-than-expected CPI print could have the opposite effect, writing: “Inflation is still a problem and while interest rate movements can’t bring high oil prices down, the Fed’s job is to respond to inflationary pressures.”
The Dow Jones Industrial Average fell 162 points, or 0.3%, by approximately 9:45 a.m. ET, while the S&P 500 and Nasdaq slumped 0.5% and 0.7%, respectively.
Brent crude oil surged 4.1% to $105.39 a barrel, its highest level since May.
Long-term Treasury yields rose after the report, extending a hot streak after traders were disappointed by the Treasury Department’s $6 billion government debt buyback plan on Wednesday.
The US 10-year Treasury yield jumped to 4.922%, nearing a closely-watched 5% level. The US 20-year Treasury yield hit 5.361%.
Energy costs were up 4.2% in August as the Strait of Hormuz crisis continued to disrupt global energy supplies. Over a third of the total wholesale inflation increase came from a 24.1% increase in diesel fuel – which has only continued to rise, hitting a record high of $5.94 a gallon this month.
Gasoline, jet fuel and home heating oil costs also pushed inflation higher.
In the US, national average gasoline prices have remained stubbornly above $4 a gallon.
Airlines have started sounding the alarms over rising fuel costs, with Ryanair CEO Michael O’Leary on Thursday warning travelers to brace for a “significant uplift” in airfares.
And as the weather starts to cool, Americans could face higher heating bills if the Iran war lasts months longer.
Goods prices rose 1.1% in August.
Services prices ticked up 0.1%, largely caused by a 2.3% rise in transportation and warehousing and warehousing services.
Portfolio management costs – the fees that financial advisors charge their clients – actually fell 1.6% in August, but the metric is still 18.8% higher than the same time last year.
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