US producer prices rise less than forecast, putting Fed rate hike in doubt

The Federal Reserve’s rate-setters were handed a complicated data point this week. US producer prices climbed in August, but the core reading came in softer than expected, giving officials something to chew on before they gather for their September 15-16 policy meeting.

The Producer Price Index for final demand rose 0.4% month-over-month and 5.4% year-over-year in August, according to Bureau of Labor Statistics data released September 10. The core number tells a different story.

What the numbers actually say

Strip out food and energy, and producer prices rose just 0.2% on the month, against analyst expectations of 0.3%. On an annual basis, core PPI came in at 4.6%.

The headline strength was almost entirely an energy story. Goods prices jumped 1.1% on the month, driven by a 24.1% surge in diesel fuel costs. Services prices crept up just 0.1%.

The Fed’s balancing act

The Federal Reserve’s target rate currently sits at 3.50%-3.75%. That tension was on full display at the July 29 FOMC meeting, where three members dissented in favor of an immediate rate hike.

The softer core reading gives the hold-and-watch camp something to point to. The hawks, meanwhile, can point to the 5.4% annual headline figure and the diesel surge as evidence that inflation is far from defeated.

What this means for markets and the months ahead

Commodity traders are watching the diesel figure closely. A 24.1% monthly surge in diesel costs is the kind of move that ripples outward into trucking, rail, agriculture, and manufacturing.

The September 15-16 FOMC meeting will be the real verdict. The August PPI report does not close that debate, but it does tilt the scales slightly toward a hold. For anyone tracking the broader economic trajectory, the key variable to watch after the meeting is services inflation. August’s 0.1% services PPI reading is, for now, the most reassuring number in an otherwise mixed report.

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