Producer prices were unexpectedly flat last month as wholesale costs of goods turned negative, offsetting an increase in the services index, as reported by the Bureau of Labor Statistics on Friday. The US producer price index remained unchanged month over month in September on a seasonally adjusted basis, compared with the Bloomberg-polled consensus for a 0.1% gain.
The latest figure follows a 0.2% rise in August. The index for final demand goods declined 0.2% in September, compared with a flat reading the month before. Conversely, the final demand services index increased 0.2%, decelerating from a 0.4% gain in August. Within goods, energy costs dropped 2.7% last month following a 1% decline in August while food accelerated to 1% growth from 0.2%.
The headline index minus food, energy, and trade services edged up 0.1% in September, missing analysts' estimate for a 0.2% increase. The notable decline in goods prices significantly impacted the headline index, primarily driven by a marked decline in energy prices. This trend is expected to reverse in October after escalating tensions in the Middle East drive global oil prices higher.
According to Matthew Martin, an economist at Oxford Economics, the recent missile attack by Iran on Israel in retaliation for the killing of Hezbollah chief Hassan Nasrallah, alongside an Iranian commander in Lebanon, has introduced volatility into the market. Oil prices rose 9.1% last week and continued to increase, up another 1.4% this week as markets anticipate a potential retaliatory strike by Israel against Iran.
On an annual basis, producer prices increased by 1.8% last month, outpacing the 1.6% rate that analysts projected. The services measure surged by 3.1%, while goods prices experienced a year-over-year decrease of 1.1%. The final demand energy index plunged approximately 14% since September 2023. In a related report on Thursday, the BLS noted that consumer inflation surged at a faster-than-expected pace both sequentially and annually, stirring speculation that the Federal Reserve's next interest rate reduction might not be as aggressive as the previous 50-basis-point cut instituted in September.
Martin suggests that the latest PPI report supports a modest rate cut of 25 basis points in November. According to Stifel Chief Economist Lindsey Piegza, a hotter-than-expected read on both consumer and producer inflation is unwelcome for the Fed, which is still struggling to restore price stability.
Piegza indicated, 'A stellar jobs report coupled with ongoing mixed readings on prices and, in some cases, clear indications of accelerating price pressures, suggests the Fed's focus may be better directed towards inflation.' Last week, government data revealed that the world's largest economy added more jobs than expected in September, while the unemployment rate posted a slight decline..