US producer prices rose 0.4% in August as higher energy costs, airline fares and hospital services kept inflation pressures elevated, strengthening expectations that the Federal Reserve (Fed) could raise interest rates next week.
Reuters reported that the Producer Price Index (PPI) for final demand increased 0.4% from July, when prices rose an upwardly revised 0.1%, the Labour Department said on Sept 10. On an annual basis, producer prices climbed 5.4%, accelerating from 4.8% in July.
Energy was a key driver, with prices jumping 4.2% during the month as renewed US-Iran hostilities pushed oil higher. Diesel prices surged 24.1%, accounting for more than a third of the increase in producer goods costs, while petrol and jet fuel prices also rose.
Services prices edged up just 0.1%, but several components closely watched by the Fed increased sharply. Airline fares jumped 4.2% after falling in July, while hospital outpatient and inpatient care costs rose 0.4% and 0.5%, respectively.
Those categories feed into the Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation gauge. Economists estimated that core PCE prices could rise about 0.3% in August, compared with a 0.2% increase in July.
Financial markets raised the probability of a 25-basis-point Fed rate hike at its Sept 15-16 meeting to about 70%, from 62% before the PPI report, according to CME FedWatch. The Fed’s benchmark rate currently stands at 3.5%-3.75%.
Expectations for tighter policy were also supported by signs of resilience in the labour market. Initial jobless claims slipped by 1,000 to a seasonally adjusted 206,000 last week, remaining within a narrow range seen since mid-July.
However, economists remain divided over whether the Fed will move. Some expect policymakers to hold rates steady, pointing to upcoming methodology changes to PCE inflation calculations that could result in softer inflation readings.
Attention now turns to Sept 11’s August Consumer Price Index report, which could provide the final major inflation signal before the Fed’s policy decision next week.
