Producer prices rebound, keeping pressure on Fed to raise rates

REAL ECONOMY BLOG | October 12, 2022

Authored by RSM US LLP

The Producer Price Index rose by 0.4% in September after falling for two straight months, the Bureau of Labor Statistics reported on Wednesday.

The series has been closely watched recently as an additional gauge for inflation. On a year-over-year basis, the producer inflation rate was 8.5%, which will do little to dissuade the Federal Reserve from maintaining its aggressive interest rate increases.

The index came out higher than the market forecast of 0.2% for the month as goods prices including food and energy rebounded.

Some of that was offset by a downward revision in August’s reading to a 0.2% decline from a 0.1% decline.

The increase in the inflation rate was in line with our expectation for a strong rebound of the overall economy in the third quarter, which will most likely grow by more than 2%.

While the upside surprise won’t sway the Federal Reserve from raising its policy rate by 75 basis points in November, it might indicate a similar upside surprise from the more highly anticipated data on September’s Consumer Price Index, which will be released on Thursday.

In two of the past three reports, a higher-than-expected CPI number was registered after producer prices came in above expectations.

Stripping out energy and food, the Producer Price Index was in line with the market forecast of 0.3%. The prior reading was revised downwardly by 0.1 percentage point to 0.3%.

The report also included trade prices—a proxy for wholesale and retail margins—which rose by 0.1% on the month. That was a significant drop from an average of 0.7% in the prior three months, most likely because of the current high level of excess inventory. That high level is forcing retail and wholesale service providers to offer more discounts, which reduces profit margins.

Inside the data

Inside the report, prices for intermediate goods, services and raw materials also increased on the month. Processed goods prices were up by 0.1% while intermediate service prices increased by 0.3%. Unprocessed goods prices rose by 0.3% in September.

The broad-based increases in all stages of the production process suggest that producers had to raise the final prices to keep up with their costs rather than market power exploitation, a troubling sign as the concerns about inflation becoming entrenched gained some ground in the Federal Reserve’s most recent minute.