Services, Food Boost U.S. Producer Prices; Some Rays Of Hope Emerging

U.S. producer prices increased more than expected in September, but underlying goods prices were unchanged for the first time in nearly 2-1/2 years, offering some hope in the battle against inflation.

Despite the mixed report from the Labor Department on Wednesday, inflation remains stubbornly high, likely compelling the Federal Reserve to raise interest rates by 75 basis points next month for the fourth time this year.

"Inflation is all about pass-through costs at the lower level of production so this report counts as some relief for beleaguered consumers who face runaway inflation on the goods sitting on store shelves," said Christopher Rupkey, chief economist at FWDBONDS in New York.

"The Fed's war on inflation hasn't been won yet, but at least the costs of goods at the producer level have stopped rising at a rate that looked out of control earlier this year."

The producer price index for final demand rebounded 0.4% last month. Data for August was revised lower to show the PPI falling 0.2% instead of dipping 0.1% as previously reported. Economists polled by Reuters had forecast the PPI rising 0.2%.

A 0.4% rise in the price of services accounted for two-thirds of the increase in the PPI in September. Services climbed 0.3% in August. More than a quarter of the rise in September was driven by a 6.4% surge in hotel and motel accommodation prices.

There were also increases in the costs of food and alcohol retailing, portfolio management, machinery and vehicle wholesaling, oil and gas well drilling services as well as hospital inpatient care.

But prices for long-distance motor carrying fell as did fuels and lubricants retailing and consumer loans.

Goods prices increased 0.4% after declining 1.1% in August. A 1.2% jump in the price of food accounted for 60% of the increase in goods. Food prices were boosted by a 15.7% surge in the cost of fresh and dry vegetables. There were also increases in the prices for chicken eggs and pork.

Energy prices rose 0.7%, driven by diesel fuel, residential natural gas and home heating oil. Excluding food and energy, goods prices were unchanged. This was the weakest reading for the so-called core goods since May 2020.

U.S. stocks opened higher. The dollar rose against a basket of currencies. U.S. Treasury prices were mixed.

SUPPLY CHAINS EASING

In the 12 months through September, the PPI increased 8.5% after advancing 8.7% in August.

The moderation in annual producer inflation is being driven by an easing in supply chain bottlenecks as well as a retreat in commodity prices from the highs seen in the spring. But oil and gasoline prices have likely bottomed following last week's decision by the Organization of the Petroleum Exporting Countries and allies to cut crude production.

Data on Thursday is likely to show consumer prices picking up in September, according to a Reuters survey of economists.

Financial markets have almost priced-in a rate hike of three-quarters of a percentage point at the Fed's Nov. 1-2 policy meeting, according to CME's FedWatch Tool. The Fed has since March raised its policy rate from near zero to the current range of 3.00% to 3.25%.

Excluding the volatile food, energy and trade services components, producer prices also rose 0.4% in September.

The core PPI increased 0.2% in August. In the 12 months through September, the core PPI rose 5.6% after a similar gain in August.