U.S. September PPI Surges 1.3%... Will Fed Hold Rates in October Amid Spending Mirage? (Comprehensive)

September PPI Surges 1.3%

Biggest Increase in 4 Years and 6 Months

Retail Sales Rise 0.8%

Just 0.2% Excluding Gas Stations

High Oil Prices Spread Inflationary Pressures

The U.S. producer price index (PPI) rose by the largest amount in four years and six months in September, while retail sales also exceeded market expectations. However, much of the increase in retail sales stemmed from a sharp rise in gasoline prices caused by the war in Iran, heightening concerns about both inflationary pressure and slowing consumption in the U.S. economy.

Products are displayed at a store in Manhattan, New York. New York, U.S. = Correspondent Hwang Yunju

The U.S. Department of Labor said on October 15 (local time) that the PPI rose 1.3% in September from the previous month. This was the highest increase since March 2022, when it rose 1.7%, and more than double the 0.6% forecast by economists surveyed by Dow Jones. Year over year, the index rose 6.3%, its largest increase since December 2022.

The surge in the PPI was driven by rising energy prices. Prices for energy goods jumped 10.8% in September from the previous month. Gasoline and diesel prices surged 20.3% and 21.0%, respectively. The prolonged war in Iran has kept international oil prices high, driving up companies' production and transportation costs.

There were also signs that inflationary pressure was spreading beyond the energy sector. The core PPI, which excludes food, energy and trade services, rose 0.5% from the previous month. This indicates that companies are facing broad-based cost increases.

Because changes in the PPI can be reflected in prices for final consumer goods after a certain lag, the index is viewed as a gauge of the future direction of consumer prices.

September Retail Sales Top Expectations...But High Fuel Prices Create an Illusion

The effects of high fuel prices were also evident in the retail sales data released the same day. According to the U.S. Department of Commerce, retail sales totaled $745 billion in September, up 0.8% from the previous month. This exceeded the market forecast of 0.4% compiled by Dow Jones. Sales were up 6.3% year over year.

However, the detailed figures make it difficult to conclude that consumption strengthened across the board. Gas station sales surged 6.4% from the previous month in September, lifting the overall index. Excluding gas station sales, retail sales rose 0.2%.

The Commerce Department's retail sales data are nominal figures that are not adjusted for price changes. As a result, when gasoline prices rise, the value of sales at gas stations can increase even if the volume of fuel sold does not.

Bloomberg reported that September retail sales were nominal figures unadjusted for price changes, and that rising gas station sales masked mixed results across other sectors. This suggests that the increase in retail sales may not fully reflect genuine strength in consumption and that high prices are squeezing household purchasing power. 

The consumer price index (CPI), released the previous day, also reinforced concerns about a renewed acceleration in inflation. The CPI rose 0.6% in September from the previous month and 3.7% year over year. The annual increase exceeded the market forecast of 3.6%.

Inflationary Pressure Rises...Markets Lean Toward October Rate Hold

With inflationary pressure gathering force again, markets are focusing on the regular meeting of the Federal Open Market Committee (FOMC) scheduled for later this month.

Last month, the Fed raised its benchmark interest rate by 0.25 percentage points to a range of 3.75% to 4.00% annually. Recent price increases alone would strengthen the case for another rate hike. However, the slowdown in consumption growth is making the Fed's decision more difficult.

The U.S. labor market is maintaining a "low-hire, low-fire" state, with companies reducing new hiring while refraining from laying off existing employees. Although there has been no sign of large-scale layoffs, concerns are growing that prolonged weakness in new hiring could erode consumers' ability to spend.

Markets expect the Fed to hold its benchmark interest rate steady at the October FOMC meeting. The CME FedWatch tool puts the probability of a rate hike at around 30%.

Chris Osmond, chief investment officer (CIO) at Fifth Third Wealth Advisors, said, "Inflation is heating up and consumers are still spending, but the underlying drivers of consumption are weakening, while the labor market is frozen rather than collapsing."

He added, "This is an increasingly uncomfortable combination for the Fed. Holding rates steady remains a defensible decision, but the cost of waiting will rise if inflation does not ease."

This content was produced with the assistance of AI translation services.