Growth hits highest in over four years! U.S. September PPI surges to 6.3% year-over-year, far exceeding expectations, energy costs batter the economy.

The U.S. Bureau of Labor Statistics (BLS) reported on Thursday (October 15) that the September Producer Price Index (PPI) for final demand rose 6.3% year-over-year and 1.3% month-over-month; core PPI, excluding food and energy, rose 5.0% year-over-year. All four readings came in comprehensively and significantly above market expectations (forecast at 5.3% year-over-year, 0.5%0.6% month-over-month, and 4.4% core year-over-year), indicating further intensification of price pressures at the production end. Energy prices were the main driver of this round of PPI increases. Diesel prices had already risen 24.1% in August alone, and in September retail diesel prices briefly hit a record high of $6.528 per gallon, with year-over-year gains at one point exceeding 70%. Diesel is a key input for road freight, rail, and agricultural production, and its price increases are gradually being passed through to business costs via fuel surcharges and transportation contracts. Analysts cautioned that even if diesel prices stop rising, there is still a lag in cost pass-through, and corporate-side inflationary pressures have not yet fully materialized. The report indicates that ahead of the November midterm elections, underlying inflation remains firm while fuel prices continue to rise; the affordability of the cost of living is a core issue in this election. September retail sales, also released the same day, rose 0.8% month-over-month, likewise exceeding expectations, showing that consumption remains resilient amid elevated prices, combining with the hotter-than-expected production-side inflation to form a hawkish combination for the Federal Reserve. This data follows Wednesday's stronger-than-expected September CPI (3.7% year-over-year, 2.6% core CPI year-over-year), further reinforcing market expectations that the Federal Reserve will continue to tighten policy. After the data was released, U.S. stock index futures fell, spot gold briefly plunged, and traders increased their bets on a Fed rate hike. Several subcomponents of PPI are particularly important for the Federal Reserve, as they will feed into the Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, where subcomponent performance will be more divergent. The airline ticket price index jumped 5% month-over-month, but several healthcare categories were relatively weak. The U.S. Bureau of Economic Analysis is scheduled to release September PCE price data, along with income and spending data, on October 29. Meanwhile, another report on Thursday showed that New York State factory activity recorded its strongest growth in nearly five years, with new orders and shipments increasing significantly. The New York Fed's October general business conditions index rose 17.9 points to 25.5, above the expectations of all economists in a Bloomberg survey. The report also showed that price pressures are expected to remain elevated in the coming months. The index of expected prices paid over the next six months rose to its highest level since 2022. On the policy front, the Federal Reserve had just voted 12:0 on September 16 to raise rates by 25 basis points to 3.75%4.00%, the first rate hike since July 2023, and is currently in a rate-hiking cycle; the chair is Kevin Warsh, and the next FOMC meeting is scheduled for October 2728. Several officials have recently struck a cautious tone, with San Francisco Fed President Daly saying there is no need to rush to hike in October, but further adjustments may still be needed within the year; Fed Governor Goolsbee called the September inflation data "disappointing" and noted that services inflation remains above 5%. Chair Warsh will deliver a speech on Friday (October 16) at the IMF annual meeting.