US producer prices post largest gain in 4-1/2 years; retail sales beat expectations

US producer prices increased by the most in 4-1/2 years in September amid rising costs for goods and services, the latest indication of inflation broadening out beyond energy products.

The report from the Labor Department on Thursday also showed large rises last month in key components that go into the calculation of the main inflation measures tracked by the Federal Reserve for its ‌2% target, leading some economists to anticipate another interest rate increase this month.

Financial markets, however, continued to expect the next rate hike only in December. The government on Wednesday reported a broad increase in consumer prices in ‌September. Inflation is being driven by the dragging US-Israeli war with Iran, which is keeping oil prices elevated. Rising gasoline prices helped to boost retail sales in September, though the underlying trend in spending slowed, other data showed on Thursday.

"We expect the Federal Reserve to raise rates at their meeting ​at the end of the month, as stickier inflation and a solid labor market convince officials that they need to move sooner than markets anticipate," said Matthew Martin, a senior US economist at Oxford Economics.

The Producer Price Index for final demand jumped 1.3% last month, the largest gain since March 2022, after an upwardly revised 0.5% rise in August, the Labor Department's Bureau of Labor Statistics said.

Economists polled by Reuters had forecast the PPI increasing 0.5% after a previously reported 0.4% gain in August. In the 12 months through September, the PPI soared 6.3%, the biggest rise since December 2022. That followed a 5.6% advance in August.

Producer goods prices increased 2.6%, the largest increase since the government started tracking the series in December 2009. A 10.8% surge in energy prices accounted for ‌more than 80% of the broad-based rise in goods prices. Gasoline prices rose 20.3%. ⁠There were also increases in the prices of diesel, jet fuel and residential electric power.

Wholesale food prices rebounded 1.2% after declining for three straight months. Most food is transported by trucks and last month's jump could be an early sign of the effects of record diesel prices spilling over to the broader economy.

Excluding the volatile food and energy components, producer goods prices rose 0.3%. The ⁠so-called core goods gained 0.4% in August. Services prices shot up 0.8% after climbing 0.2% in the prior month. A 1.4% surge in margins for trade services accounted for nearly half of the broad-based increase in services prices.

There were also increases in the costs of transporting freight by road. Hotel and motel room prices shot up 5.6% while airfares jumped 5.0%. But margins for automotive fuels and lubricants retailing plunged 30.3%.

FIRMER PCE INFLATION READING EXPECTED

Prices for securities brokerage also fell. Hotel and motel rooms as well as airfares are key components in ​the ​Personal Consumption Expenditures price indexes.

Economists estimated that core PCE inflation increased 0.35% in September, which could round up to 0.4%. That would translate ​to a year-over-year increase of 3.1%. Core PCE inflation gained 0.2% in August and advanced 3.0% ‌on a year-over-year basis.

Financial markets saw a roughly 30% chance of a rate increase at the Fed's October 27-28 policy meeting, CME Group's FedWatch Tool showed. The odds of a rate increase were reduced by underwhelming payroll gains in September as well as cooler-than-expected PCE inflation readings for July and August.

The Fed in September raised its overnight benchmark interest rate by 25 basis points to the 3.75%-4.00% range.

US stocks fell, with the Nasdaq Composite near one-month lows. The dollar eased against a basket of currencies. US Treasury yields slipped.