PPI still 'uncomfortably high' as December rate hike looms

The latest Producer Price Index (PPI) data, released early Friday, provided yet more hints that advisors and their clients could see a December rate hike from the Federal Reserve.

In its statement, the Bureau of Labor Statistics said that last month, PPI increased 6.5% on a year-over-year basis – after rising 6.3% in September – just below economists’ forecast of a 6.6% October increase. This marked the largest 12-month rise since moving up 7.4% in November 2022, officials said.

PPI rose 0.3% in October after increasing 1.4% in September, revised from 1.3%. Economists surveyed by the Wall Street Journal and Dow Jones Newswires were looking for an increase of 0.4%.

Core PPI, which excludes food and energy, rose 0.3%, after increasing 0.7% in September. Analysts surveyed by Dow Jones Newswires and the Journal were looking for an increase of 0.3%.

After the release of the  PPI data, the CME's FedWatch tool raised the odds of a December rate hike to between 4% and 4.25% at 89.7%, up from 85% on Thursday. The odds of a hike to between 4.25% and 4.5% were 10.3%, compared to 15% a day earlier.

The PPI numbers provide the latest evidence on the elevated inflationary environment in the U.S. The CPI inflation reading for October came in hotter than expected earlier this week, also fueling the likelihood of a December rate hike from the Federal Reserve.

Federal Reserve Governor Christopher Waller thrust the possibility of a December rate hike into the spotlight Tuesday. CNBC reported that, during a speech in London, Waller said that he would support a quarter-point rate increase in December, but could push for a half-point increase if inflation is higher than expected.

Stephen Coltman, head of macro at 21shares said that the recent run of inflation readings have spooked the Fed. The central bank, he noted, “is now warning about the need to potentially squeeze harder than previously anticipated to ensure inflation expectations do not become unanchored.”

“Today’s PPI print, while modestly below consensus forecasts, remains at an uncomfortably high level and will not be enough by itself to take a 50bps hike in December off the table,” he added.

For LPL chief economist Jeffrey Roach, Friday's PPI print offers additional support for a likely hawkish Fed heading into the last rate decision of 2026.

"While some committee members may advocate more aggressive action, we should expect a 25-basis-point rate hike," Roach said. "Given the fragility of the broader economy, a larger 50-basis-point increase could pose unnecessary risks."

Chris Zaccarelli, chief investment officer for Northlight Asset Management, says that despite its dual mandate, the Fed is "purely focused on [price stability] at this point," which will heighten scrutiny over every data release on inflation.

"We believe the Fed will raise rates 25 bps in December, and January will also be a live meeting that they will only skip (e.g. leave rates unchanged) if the inflation data improves meaningfully," Zacarrelli said, adding that "if current inflation trends don’t change then they will be forced to raise rates an additional 25 bps at that meeting as well."

Last week the October jobs report came in better than expected, also strengthening the case for a December Fed rate hike.

Before that, the Federal Reserve hit the pause button last month, keeping the interest rate steady despite the ongoing pressures of elevated inflation.

In September, the Fed raised interest rates for the first time since July 2023 in a unanimous 12-0 vote, defying months of pressure from President Donald Trump to make a cut.