Producer prices rose 0.4% in August as diesel jumped 24%
The Labor Department said Thursday, September 10, that final-demand prices increased 0.4% on the month and 5.4% from a year earlier, a day before August CPI and the Fed's September meeting.
Diesel fuel prices jumped 24.1% in August and accounted for more than a third of the rise in final-demand goods, the Bureau of Labor Statistics said at 8:30 a.m. Eastern, reversing a summer dip in energy that had briefly cooled wholesale inflation. The monthly producer-price index matched economist forecasts. The annual rate did not: it rose to 5.4%, against a 5.3% forecast, from a revised 4.8% in July.
That is the inflation picture the Federal Reserve takes into its September 15-16 meeting, and it was taken before this week's move in crude. Brent was at $104.59 a barrel as of about 9:50 a.m. Eastern, up 3.3% on the session. August's survey was already closed.
On Thursday, September 3, Fed Governor Christopher Waller told a Reuters interview that his policy decision would be "heavily influenced by what we learn about August inflation." If incoming data showed that progress toward 2% had been fleeting, he said, "it may be appropriate to raise the policy rate when the FOMC meets on September 15 and 16." He added: "If inflation comes in hot, I would consider a rate hike."
Before 8:30 a.m., fed funds futures implied a 62% probability of a quarter-point increase at next week's meeting. Thursday's producer-price report does not settle that test: the headline accelerated, the core measures did not.
Energy lifted the headline; the core did not
Final-demand prices increased 0.4% in August after a 0.1% rise in July that BLS revised from unchanged, and a 0.1% decline in June. Goods rose 1.1%, the first increase after two monthly declines. Services rose 0.1% for a third consecutive month.
Energy did the work on goods. Final-demand energy increased 4.2%, after a 3.1% drop in July. Diesel led that rebound. Gasoline rose 4.2%; jet fuel and home heating oil also increased. Foods rose 0.1%. Goods excluding foods and energy rose 0.4%.
Trade services, the margin wholesalers and retailers take, fell 0.2%. Transportation and warehousing services rose 2.3%, led by a 2.0% increase in truck transportation of freight.
Strip out food and energy and the picture is quieter, which is the cut that maps more closely onto Waller's test. That core index rose 0.2% on the month, against a 0.3% forecast, and 4.6% from a year earlier. BLS's broader gauge, which also removes trade services, rose 0.3% after 0.4% in July. Over 12 months that measure was 4.7%, the same annual rate as in July. The report does not offer a numerical read-through to August core PCE, the Fed's preferred inflation gauge.
Yields at 52-week highs, duration funds at 52-week lows
By about 9:50 a.m. Eastern, the 10-year Treasury yield was at 4.921%, up 8.5 basis points on the session, after tagging a 52-week high of 4.924%. The 5-year yield was at 4.704% and the 30-year at 5.349%, each also at a 52-week high. Yields had already been rising into the report; they moved higher again after 8:30 a.m.
Long-dated U.S. Treasuries held in TLT were down 0.95% at $80.96 and had traded as low as $80.91, a 52-week low. Inflation-protected Treasuries did not catch a bid.
SHY and TIP also traded at 52-week lows in the same window.
Equities followed the same direction, with more give in the rate-sensitive end of the board. The S&P 500 was down 0.64% at 7,587.65. The Nasdaq-100 was down 1.14% at 29,087.60. The U.S. dollar index was up 0.16% at 98.97. Gold was down 1.1% at $4,411.
One morning's reaction does not price the FOMC.
Friday's CPI is the remaining test
BLS will publish the August consumer-price index on Friday, September 11, at 8:30 a.m. Eastern. Waller has already said what would keep him on hold: "If there is continued progress toward our 2% goal, then I am willing to support holding the policy rate at its current level." The other side of that fork does not require a large miss. "It may not take much acceleration in inflation to nudge me into supporting tighter policy."
Short-term Treasuries are the bonds that reprice first if the committee hikes next Wednesday. SHY at a 52-week low, on a 0.16% decline, is not a front end being used as a place to wait out Friday.
Frequently asked
How much did producer prices rise?
Final-demand prices rose 0.4% on the month, matching forecasts, and 5.4% from a year earlier, above the 5.3% expected.
What drove the increase?
Energy: final-demand energy rose 4.2%, led by diesel, which jumped 24.1% and made up more than a third of the goods increase.
Does this mean the Fed will raise rates?
The report cuts both ways, the headline accelerated while core measures did not, and futures had implied a 62% chance of a quarter-point hike before the release.
What happened in markets?
The 10-year yield rose to 4.921% after touching a 52-week high, long-term Treasury and inflation-protected bond funds fell to 52-week lows, and stocks and gold declined.