Advisors got more insight into the U.S. inflation picture as the latest Producer Price Index (PPI) data came in much higher than expected Thursday, increasing the chances of an October rate hike from the Federal Reserve. PPI rose 1.3% in September, up from 0.4% in August, and well above the 0.6% forecast from economists surveyed by Dow Jones Newswires and the Wall Street Journal.
The Bureau of Labor Statistics, which released the PPI data, noted that the September increase is the largest advance since rising 1.7% in March 2022.
Advisors and their clients will be closely monitoring the inflation data for clues as to the Federal Reserve’s next interest rate move. Last month the central bank raised rates for the first time since July 2023 and all eyes are now on the next Fed meeting, which takes place on October 27 and 28.
In its statement released early Thursday, the Bureau of Labor Statistics said that PPI increased 6.3% on a year-over-year basis, after rising 5.4% in August, easily surpassing economists’ forecast of a 5.4% increase. This also marked the largest 12-month increase since moving up 6.4% in December 2022, according to the Bureau of Labor Statistics.
Core PPI, which excludes food and energy, rose 0.7%, after increasing 0.2% in August. Analysts surveyed by Dow Jones Newswires and the Wall Street Journal were looking for an increase of 0.3%.
The CME’s FedWatch tool puts the probability of a hike to between 4% and 4.25% at 33.8% for October’s Fed meeting, up from 29.3% before the PPI data came out. For December’s Fed meeting, the likelihood of a hike to between 4% and 4.25% is 63.2%. The tool, which updates in real time, gives a 30.6% likelihood of a December raise to between 4.25% and 4.5%.
This is a big week for economic data. PPI is an important indicator of inflation and comes hot on the heels of the latest Consumer Price Index data. Core CPI again came in hotter than expected on Wednesday, putting more pressure on the Federal Reserve to make another rate hike.
"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.
Zaccarelli isn't expecting a rate hike in the upcoming session, given the approaching midterm elections. He's expecting a hawkish move at the December meeting, with participants moving the Fed funds rate up another 25 bps.
"This rising rate environment is a new challenge for markets to face in the second half of the year," he said, pointing to the Iran war and the consequent spike in energy prices as the main challenge for the first half.
"If this market is one thing it is resilient, and we believe that resilience will last through the end of the year," Zaccarelli added, "but we need to get through the uncertainty of the rapidly approaching mid-term elections, and the volatility that this creates, before the market can finish the year stronger."
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