Wholesale inflation jumped last month by most in 4 years as gas prices soared

Wholesale prices in September rose to their highest level in nearly four years, largely propelled by higher energy prices. The sharp increase stokes concerns that inflation could broaden and keep the Federal Reserve on watch for further rate hikes.

The Producer Price Index (PPI) for final demand, which measures the prices that factories, farmers, and producers charge for their finished goods and services, rose 6.3% last month, the largest increase since December 2022. The data trounced expectations for a 5.4% rise.

On a "core" basis, excluding food and energy, PPI jumped 0.7% month over month in September, handily higher than market expectations of 0.3%. On a year-over-year basis, this core measure jumped 5.0%, up from 4.7% previously

"With a second day in a row of higher-than-expected inflation numbers, it seems the Fed will have no choice but to raise rates again this year," said Chris Zaccarelli, chief investment officer for Northlight Asset Management.

"While we don't expect them to raise rates later this month because it is so close to the mid-term election, we do think that they will increase the Fed Funds rate another 25 bps in December," Zaccarelli added.

Half of the September increase in the index for final demand goods can be traced to gasoline prices, which jumped 20.3%. In contrast, prices for chicken eggs dropped 39.7%.

Read more: How to protect your savings against inflation

Looking into the supply chain, the increases in the price of goods sold by one business to another were broad-based, with the index for processed goods rising 2.5%, prices for unprocessed goods moving up 8.4%, and the index for services advancing 0.9%.

The index for processed goods sold to other businesses rose 2.5%, the largest rise since jumping 2.8% in May — with most of the increase due to a 10% spike in energy prices. Nearly half of the rise in processed goods sold to other businesses is attributable to a 21% increase in diesel fuel prices.

Wholesale prices act as an early-warning pipeline for inflation. If the prices of these input goods rise, manufacturers could pass those higher costs down to consumers later.

AP Photo/Nam Y. Huh

In the Fed's Beige Book, released Wednesday, four districts reported that the pace of price increases has picked up since September. Higher oil prices permeated all 12 Fed districts. Companies reported elevated diesel prices and noted that fuel surcharges were passing on increased costs throughout the supply chain.

Businesses in multiple districts also noted continued price pressure from other commodities, tariffs, and insurance. Consumer-facing companies said their profit margins have tightened as price-sensitive customers continue to resist price hikes. Businesses are managing their margins with selective price hikes, targeted incentives, and menu changes that reduce their costs.

The reading on wholesale prices for September comes a day after consumer prices also surprised to the upside. The Consumer Price Index rose 3.7% in September, compared with expectations for 3.6%, and an acceleration from 3.4% in August. Month-over-month prices rose 0.6%, versus expectations for 0.5%. Stripping out volatile food and energy prices — the way the Fed likes to scrutinize underlying inflation — CPI rose 0.3% month over month, compared with expectations for 0.2%, holding the same level as August. The year-over-year rate was 2.6%, compared with expectations for 2.5%, and up from 2.4% in August.

Analysts will use PPI and CPI to back into the Fed's preferred inflation gauge – the core Personal Consumption Expenditures index. Stephen Brown, an economist at Capital Economics, estimates that core PCE rose 0.35% in September.

"That makes an October rate hike a bit more likely, with the FOMC's decision coming down to developments in broader financial conditions in the next couple of weeks and whether Fed officials are happier to surprise the market under Chair Kevin Warsh than has typically been the case," Brown said.

On Thursday morning, markets were still pricing in only about a 30% chance of the Fed hiking rates in less than two weeks, with a better chance of a hike in December.

Investors appear to be taking cues from guidance given earlier this month from Fed Vice Chair Philip Jefferson and New York Fed president John Williams, who have tempered expectations for a rate hike later this month. Both struck a more cautious tone than several of their colleagues, acknowledging that inflation has remained too high, but warning that the central bank should take time to watch and assess whether inflation will come down in a timely manner.

Williams told Bloomberg on Tuesday that he still sees one more interest rate hike as appropriate this year, but doesn't believe the central bank will need to raise rates again in 2027.

The minutes from the September meeting read that most participants assessed that another increase in the target range for the federal funds rate would likely be appropriate by year-end.

Chicago Fed president Austan Goolsbee told Yahoo Finance on Wednesday that hotter-than-expected September consumer inflation was "discouraging" but suggested that he wants to wait for more data before further raising interest rates. He said core inflation remaining as high as it is now would not be “acceptable” nor “compatible with the Fed target, and our policy needs to address that.”

Jennifer Schonberger is a veteran financial journalist covering markets, the economy, and investing. At Yahoo Finance, she covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance. Follow her on X @Jenniferisms and on Instagram.

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