CPI, PPI, and the "terror data" all point to one thing: energy inflation is permeating the U.S. economy, and pressure on the Fed to raise rates is surging.

Title context: CPI, PPI, and the "terror data" all point to one thing: energy inflation is permeating the U.S. economy, and pressure on the Fed to raise rates is surging. Text: The U.S. Commerce Department and Bureau of Labor Statistics on Thursday released two data sets that explain "how the energy shock is penetrating the U.S. economy" more clearly than Wednesday's CPI. On one side is retail: September retail sales rose 0.8% month over month, above economists' expectations of 0.3%, but the prior August reading was revised up to 1.3%excluding autos and gasoline, sales rose only 0.2%, while "control group" sales excluding food services, auto dealers, building materials stores and gas stations rose only 0.1%, far below the expected 0.3%. Of 13 categories, 8 rose, led by gas stations, where sales jumped 6.4%. On the other side is inflation: the September producer price index (PPI) rose 1.3% month over month and 6.3% year over year, the largest monthly gain since March 2022 and the highest annual gain since December 2022, both far exceeding expectations. Core PPI, excluding food and energy, rose 0.7% month over month and 5.0% year over year, jumping from 0.2% and 4.6% in August. From oil field to checkout counter: a transmission chain that has already been opened The first link in this chain is crude oil. Brent crude rose 0.35% on Wednesday to $106.06 a barrel, after two ships were attacked in the Strait of Hormuz and Iranian officials said they were deploying new tactics to strike vessels, reigniting the risk of supply disruption. Since the U.S.-Iran war broke out in February, this geopolitical line has been the main driver of U.S. inflation. The second link is gas stations. In September, gasoline prices surged 7.1% month over month, directly pushing that month's CPI to 3.7% year over year (3.4% in August), above the expected 3.6%. Gasoline prices rose 9.1% from August to September, single-handedly contributing more than half of the total CPI increase. The third link is the corporate side, which is exactly what Thursday's PPI report revealed: energy prices rose 10.8% month over month, transportation and warehousing prices rose 3.4%, and food rose 1.2%. One notable transmission example is airline ticketsas one of the inputs to the PCE price index, airline ticket prices jumped 5% month over monthmeaning fuel costs are entering services pricing through the transportation link. Half of the rise in the September PPI final demand goods index can be attributed to higher gasoline prices, which rose 20.3%. Price indexes for diesel, fresh and dry vegetables, jet kerosene, residential electricity and crude oil also all rose. Another clue is that wholesale and retail trade services margins jumped 1.4% month over month, the largest increase since April; this indicator has been used by the market to observe whether companies are absorbing tariff costs themselves or passing them on to customers. The Supreme Court earlier this year overturned most of Trump's tariffs, but the government is invoking other authorities to continue imposing them, and the trade war with Canada is also escalating after negotiations broke down in August. But transmission is not uniform. Several prices in PPI related to data center construction actually cooled: electronic components and accessories prices fell 0.3% month over month, computer and computer equipment prices edged up 0.1%, and the broad construction cost index was basically flat; several healthcare categories were also relatively weak. This set of figures shows that current price pressure is concentrated in energy and its direct downstream, rather than spreading across the boardat least in September. Consumption: the numbers have not collapsed, but purchasing power is being eroded The headline retail sales beat was easy to read as "consumption remains strong." Breaking down the structure gives a much more cautious conclusion. First, the 0.8% increase relied heavily on the single category of gas stations. Excluding that, only 0.2% remained; after also excluding autos, building materials and food services, only 0.1% remained. Retail data are seasonally adjusted but not inflation adjusted. If September's 0.6% monthly price increase is included, real retail sales were "flatter than flat." Second, real purchasing power is declining. The report noted that inflation-adjusted wages fell again in September; consumers are still spending largely because of high-income households supported by stock gainsthe so-called K-shaped economy. The Fed's Beige Book released Wednesday confirmed this: from late August to early October, most districts reported consumer spending was "little or unchanged"; even in a district like Dallas, where businesses reported solid retail sales, there were "some reports of low-income customers becoming more cautious." Another set of data from the Bank of America Institute this week provided more underlying evidence: use of buy now, pay later (BNPL) is rising. The institute said the pace was "not yet overly concerning," but also warned that "nearly one in five households using BNPL has more than $500 in payments due." The CEOs of Domino's Pizza and Albertsons both acknowledged on recent earnings calls that many consumers remain in a difficult economic environment. Moody's chief economist Mark Zandi's quantitative estimate on October 12 was even more striking: since the U.S.-Iran war broke out in February, the cumulative cost borne by each U.S. household has risen to nearly $2,000, totaling about $265 billion nationwide; among that, average gasoline prices rose from less than $3 before the war to $4.37 a gallon, diesel exceeded $6, and jet fuel nearly doubled. Energy items cost each household nearly $1,100 more (including direct payments at gas stations and higher goods prices driven by truck and air transport costs), and "at current fuel prices, household energy expenses are still rising by an extra $50 per week." He also noted that rate hikes have pushed mortgage costs to 7.5%, equivalent to an additional burden of about $540 per household, with military spending at about $360 per householdthe total cost of the war has offset about half of the income growth of the average American household over the past eight months. On the other side is anomalous resilience: a healthy job market, unusually large tax refunds and stock market gains have together supported consumer demand for most of this year. Economists expect third-quarter consumer spending to grow at an annualized rate of about 3.4% (3.8% in the second quarter), with third-quarter GDP growth estimated at about 3.0% (2.2% in the second quarter). Another data release Thursday was also strong: the New York Fed's October manufacturing sentiment index jumped 17.9 points to 25.5, above every economist's estimate in a Bloomberg survey and the strongest in nearly five years, with new orders and shipments rising significantlybut in the same report, the index of expected prices paid over the next six months rose to its highest since 2022, amounting to companies themselves signaling that pressure will continue. The Fed's helplessness in the face of supply-driven inflation: likely to hold in October, with pressure pushed to December The two inflation reports together have pushed the Fed into a more difficult position. Inflation has been above the 2% target for five and a half years. The federal funds rate is currently 3.75%4.00%, and last month the Fed raised rates for the first time in three years. The next policy meeting is October 27-28. CME FedWatch shows that after Wednesday's CPI release, the probability of a rate hike this month briefly rose from about 22% to 50%, then fell back and stabilized at about 30%; pricing for a December hike, however, was firmly locked in, with Citi expecting a December hike and market-implied odds for that month once approaching 90%. Wall Street's disagreement is almost entirely focused on "October or December" TD Securities strategists Oscar Munoz and Gennadiy Goldberg: today's report raised the possibility of an October hike, "but we still think the Fed will hold and choose December, because the market is already doing part of their work for them"; Skyler Weinand of Regan Capital: "It is crystal clear that inflation is sticky and moving in the wrong direction," expecting a pause in October and a resumption of hikes in December; Seema Shah of Principal Asset Management: the question is whether firmer core inflation is enough to change the Fed's path, and the market is clearly uneasy, "but this report is not enough to justify restarting a October hike"; Jeff Roach of LPL Financial: inflationary pressure is spreading beyond energy, meaning the last mile back to target may be bumpy and rates will stay high, and this report makes the Fed's decision this month more complicated; Chicago Fed President Austan Goolsbee's remarks last month were a footnote to this policy dilemma: supply-driven inflation may be easier to control than post-pandemic demand-driven inflation, but "it will not be painless"; U.S. Bank chief economist Beth Ann Bovino: "Inflation is the disease, and the medicine the Fed is now bringing is higher interest ratesI don't know which is more painful, because both are painful." This may be the "2026 policy trap": the Fed cannot produce an extra barrel of oil, end a war, or conjure more memory chips out of thin air. All it can do is slow down the rest of the economy unrelated to oil drilling and data center constructionand the people most likely to feel that are precisely the ones already paying more. Warsh has promised not to use his own near-term policy outlook to guide the market. He will hold a fireside chat with IMF Managing Director Kristalina Georgieva in Bangkok on Friday, and the tone of those remarks will be closely scrutinized. U.S. stocks face a test: high yields become an obstacle After Wednesday's CPI, the S&P 500 fell 1.11% to 7,718 points, ending the longest streak in six years without a 1% single-day drop and marking the worst single-day performance since July; the Nasdaq Composite fell 1.88% to 26,692 points; the Russell 2000 entered correction territory; an index of chip giants fell 4.3%, down about 12% over six trading days. The 10-year Treasury yield briefly jumped from below 5.17% to above 5.32%, then gave back most of the gain; the dollar hit its highest since May 2025. After Thursday's PPI and retail sales releases, Treasury yields extended their decline, and the Nasdaq and S&P 500 opened lower. However, safe-haven demand pushed the 10-year yield down 11 basis points to 5.08%, Nasdaq 100 futures fell 1.1%, and Brent crude retreated to around $104the market did not react along the simple path of "higher inflation more aggressive rate hikes," but instead treated the continued rout in the AI trade (Anthropic's latest investor disclosure showed slowing growth, South Korea's KOSPI briefly plunged 7.6%, and Samsung and SK Hynix fell more than 9%) as the main safe-haven theme. Mechanically, high yields suppress U.S. stocks through two channels: first, a higher discount rate directly compresses valuations of high-valuation assets; second, the massive capital expenditure on data centers and AI chips relies heavily on financing, and higher borrowing costs directly raise the hurdle for projectsthis is also why this week the AI sector spread from "valuation concerns" to "corporate debt concerns." Macro strategist Tatiana Darie put it this way: "The bogeyman of high yields returned to the market after Wednesday's inflation data, haunting stocks and pushing traders into value shares and low-beta sectors." But there are also opposing voices. Ulrike Hoffmann-Burchardi of UBS's chief investment office believes that intensifying competition in AI, rising financing needs and higher rates may amplify volatility for a time, but "we view this round of adjustment as a recalibration of expectations, not a fundamental rupture in the AI investment story"; Vanguard senior economist Adam Schickling noted that as Americans become more "price sensitive" while the economy benefits from productivity gains, inflation should slow, but "patience is needed."