Producer price inflation is expected to pick up in September as economists and market participants brace for another step up in underlying price pressures.
Forecasts differ slightly but point the same direction. One report projects a 0.5% month over month rise in headline producer prices following August’s 0.4% gain, and sees headline PPI at 5.3% year over year versus 5.4% in August, with core PPI rising 0.3% month over month and easing to 4.4% year over year from 4.6%.
Economists polled by Dow Jones showed a somewhat stronger median forecast for PPI, expecting a 0.6% monthly increase and a 5.5% year over year gain. The difference in month over month forecasts highlights uncertainty over the near term path of producer inflation.
Recent readings on consumer inflation and manufacturing activity add context. The September Consumer Price Index rose 3.7% year over year, above August’s 3.4% and consensus. Core CPI climbed to 2.6% year over year from 2.4% the prior month.
Analysts point to momentum in earlier activity data as a likely driver of higher producer prices. September purchasing managers index results from ISM and S&P Global suggested stronger-than-expected activity, which, combined with elevated energy costs, likely feeds through to September PPI.
Core producer inflation has been running above 4% on a year over year basis since April. That persistent level of core PPI underpins concerns that companies will pass costs onto customers to protect margins, keeping inflation pressures alive.
Market Reaction And Policy Implications
Markets moved quickly after the CPI surprise and ahead of the PPI release. Equities sold off with the S&P 500 dropping more than 1%, while investors rotated toward bonds, briefly pushing the 10 year Treasury yield lower to 5.19% after earlier gains.
Earlier in the session yields had climbed, with the 30 year yield near 5.517% and the 2 year yield about 4.808% after touching its highest level since late September. The intraday swings reflected growing concern about stickier inflation.
The inflation prints have shifted rate expectations. CME FedWatch probabilities for an October rate increase rose to roughly 35% from about 22.1% the prior day. There is now more than a 90% chance of at least one more rate hike before year end, and a 40% chance rates rise by a half percentage point, according to futures markets.
Market commentators warned that persistent inflation could force the Federal Reserve to raise rates further and keep them higher into 2027. Christopher Rupkey, chief economist at Fwdbonds, said inflation is alive and that higher rates are the likely remedy.
Investors will look to Thursday’s PPI print, September retail sales, and weekly initial jobless claims for further clues. Corporate watchers also noted that higher yields may weigh on growth and tech stocks, and some portfolio managers said they would hold off on adding positions until the PPI outcome and market reaction settle.
