September’s producer inflation topped forecasts as energy prices continued to rise. The data continued to suggest that strong economic activity carried over from the summer, in line with our forecast of a 3.1% growth in gross domestic product for the third quarter.
Looking ahead, though, as economic headwinds grow stronger, we do not expect the momentum to last in the final quarter, while oil prices should settle down as demand falls. We are still comfortable with our call for no more rate hikes by the Federal Reserve in November and December.
Overall prices for final demand rose by 0.5% on the month while energy prices increased by 3.3%, the Bureau of Labor Statistics reported on Wednesday.
The unexpected rise in producer inflation marked the third month in a row that the monthly figure exceeded 0.5%, bringing the three-month moving average annualized to 7.4%, a lot higher than the Federal Reserve’s long-term target rate of 2%.
When the volatile food and energy components are excluded, core inflation rose by only 0.3% monthly or 2.7% from a year ago, much less than the 0.6% increase in July.
The slight increase in core inflation should be good news for the Fed going into the final quarter when economic activities are predicted to be much slower, implying further disinflation.
Read more of RSM’s insights on the economy and the middle market.
The upside surprise in Wednesday’s data suggested a higher-than-forecast consumer price index coming out on Thursday, another key data point ahead of the Fed’s meeting in November.
Underneath the top-line figure, food prices also posted a large increase, rising by 0.9% on the month. Goods prices excluding food and energy, however, rose by only 0.1%. Service prices rose by 0.3%, driven by trade service prices, a proxy for wholesale and retail margins, which were up by 0.5%.
The takeaway
September’s high producer inflation was a continuing function of the surge in oil prices and robust demand, boosted by a healthy level of excess savings, according to our estimate. But we expect the Fed to look through September’s data, taking into account the economic headwinds happening in the final quarter to keep rates at the same level until the end of the year.
