Inflation exceeded expectations across the board, with the U.S. September PPI rising 6.3% year-on-year, setting a four-year record, and the core increase expanding to 5%

Author: Bu Shuqing, Wall Street Journal

The U.S. producer inflation indicator has once again significantly exceeded market expectations, with inflationary pressures continuing to spread to the supply side, making the Federal Reserve's interest rate hike path increasingly certain.

According to data released by the U.S. Bureau of Labor Statistics on Thursday, the September PPI rose 6.3% year-on-year, far exceeding the market expectation of 5.4%, setting the highest record since December 2022; it increased by 1.3% month-on-month, the largest single-month increase since March 2022, also significantly exceeding the expected 0.6%.

Meanwhile, the core PPI, excluding food and energy, rose 5.0% year-on-year, higher than the expected 4.4% and the previous value of 4.6%, and increased by 0.7% month-on-month, also surpassing the expected 0.3%.

After the data was released, U.S. Treasury prices expanded their gains, while stock index futures continued to decline.

This PPI data was released the day after the consumer price index (CPI) report exceeded expectations, with both reports pointing to the persistence of inflationary pressures. Analysts pointed out that the above data will strengthen the position of Federal Reserve officials to continue pushing for interest rate hikes in the coming months, especially against the backdrop of rising energy costs and the inflation issue dominating the midterm elections in November.

Energy Prices Drive Surge, Monthly Increase Exceeds 10%

The September PPI surged significantly, with energy prices being the core driving force.

According to data from the Bureau of Labor Statistics, the September energy PPI rose 10.8% month-on-month, with the energy sub-index reaching historical highs, particularly correlated with diesel prices.

At the same time, transportation and warehousing prices rose 3.4% month-on-month, and food prices increased by 1.2% month-on-month, with several sub-items showing strong price pressures.

The rapid transmission of energy costs reflects the cost pressures faced by various links in the supply chain and indicates the risk of inflation further penetrating downstream consumer sectors.

Signs of Inflation "Spreading" Worry the Market

What worries the market even more is that price pressures are no longer limited to the energy sector.

Service sector costs are being transmitted to various parts of the economy with rising energy prices, and the unexpected rise in core PPI confirms the trend of inflation "spreading."

According to Bloomberg, airline ticket prices jumped 5% in a single month, while healthcare-related sub-items remained relatively moderate.

From the price pipeline perspective, the significant rise in intermediate demand prices suggests that producer price pressures will continue in the future. Reports indicate that the price expectations index for the next six months has risen to its highest level since 2022, indicating that inflationary pressures are unlikely to dissipate in the short term.

CPI-PPI Spread Narrows, Corporate Profits Under Pressure

The price gap trend between CPI and PPI continues to send warning signals—producer cost increases are outpacing the speed at which consumer prices are transmitted, meaning corporate profit margins are under pressure.

This structural pressure poses potential risks to corporate profit prospects, especially in energy-intensive and transportation-related industries.

Federal Reserve's Interest Rate Hike Expectations Further Solidified

This PPI data, along with the previous day's CPI data, constitutes a dual pressure on the Federal Reserve's dovish stance.

According to Bloomberg, the report indicates that, on the eve of the midterm elections—where the cost of living has become a core political issue—inflationary pressures remain stubborn, and the path for Federal Reserve officials to continue raising interest rates in the coming months is basically determined.

Another piece of data released on the same day showed that the New York Fed's October manufacturing index surged by 17.9 points to 25.5, exceeding the expectations of all economists surveyed by Bloomberg, marking the strongest growth in nearly five years, with new orders and shipments significantly expanding, indicating that real economic activity remains resilient, which provides additional support for the Federal Reserve to maintain a tightening stance.