Dive Brief:
- The producer price index rose 0.4% in August, the Bureau of Labor Statistics said Thursday in a report that, while in line with expectations, flashed a warning for the next release of an inflation measure favored by the Federal Reserve.
- Higher costs for energy triggered by the U.S.-Iran war, including an increase in the cost for domestic airfares, and rising costs for hospital care will likely push up the personal consumption expenditures price index — the Fed’s preferred inflation gauge, economists said.
- Adjusting to the data, Bank of America economists raised their estimates for the increase in August core PCE, which excludes volatile food and energy prices, to 0.26% from 0.24%. If data on the consumer price index to be released Friday supports the higher inflation estimate, “it should greenlight a hike at next week’s Fed meeting,” the economists said in a note.
Dive Insight:
The fresh data on producer prices prompted traders in interest rate futures to increase the odds that Fed policymakers will push up the main rate at their Sept. 15-16 meeting to 71.4% from 61.2% on Wednesday, according to CME Group’s FedWatch tool.
Inflation has exceeded the central bank’s 2% target for five years and the benchmark interest rate, now at a range from 3.5% to 3.75%, has made little progress in reducing price pressures this year.
On an annual basis, producer prices rose 5.4% in August, the Bureau of Labor Statistics said. Goods prices rose 1.1% after declining in June and July.
Persistent hostilities between the U.S. and Iran threaten to spur inflation. Energy prices have surged during the past month, with the price of Brent crude oil rising 21% to $107.93 per barrel amid sporadic fighting.
The price of diesel fuel soared 24.1% last month, accounting for nearly two-thirds of the August increase in the index for processed goods, the Bureau of Labor Statistics said.
The prices for jet fuel, gasoline, heating oil and chemicals also rose last month, the bureau said. The cost of transportation and warehousing increased 2.3%, the bureau said, indicating a spillover from higher energy costs. Meanwhile, prices for services excluding trade, transportation, and warehousing were unchanged.
Fed Chair Kevin Warsh and Fed Governor Christopher Waller have recently expressed concern about persistent inflation.
Price pressures are the primary economic concern among economists, policymakers and investors, according to the most recent Blue Chip survey.
Seventy-nine percent of survey respondents said inflation posed a higher risk to the economic outlook than trends in the job market.
