US Sep PPI Flat; Fed's 25bps Rate Cut Next Month "A Done Deal"?

This report indicates that inflation is further easing, supporting the view that the Federal Reserve will cut interest rates again next month.

U.S. producer prices were unchanged in September, with falling gasoline prices curbing price increases, indicating that inflation is further easing and supporting the view that the Federal Reserve will cut interest rates again next month.

A report released by the U.S. Bureau of Labor Statistics on Friday showed that the September PPI month-on-month growth rate was the same as in August, after the index rose by 0.2% month-on-month in August. The September PPI rose by 1.8% year-on-year, the smallest increase since February this year.

Many economists prefer to use a less volatile indicator that excludes the impact of food, energy, and trade, which rose by 0.1%, the smallest increase since May 2023.

The PPI data was released shortly after the more closely watched CPI data, which showed that CPI inflation in September was slightly higher than expected, driven by rising prices for housing, food, and clothing.

Federal Reserve officials will consider these two reports as they plan their path to lower interest rates. Economists often analyze categories in the PPI data related to the Federal Reserve's preferred inflation indicator (the PCE price index), but these categories have mixed performances.

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The September PPI report showed that there was almost no change in the costs of doctor care and outpatient hospital fees, while airfare prices rebounded sharply. Portfolio management fees increased slightly.

Service costs rose by 0.2%, slowing down from a 0.4% increase the previous month. Food wholesale prices rose by 1%, the largest increase since February, while energy prices fell by 2.7%.

The September PCE price index will be released later this month.

After the PPI data was released, U.S. Treasury yields continued to rise, with traders expecting the Federal Reserve to cut interest rates by 25 basis points next month.The Federal Reserve initiated a rate cut last month, lowering interest rates by 50 basis points following several months of cooling inflation and slowing wage growth. Subsequently, reports indicated a significant increase in employment and persistent price pressures, prompting economists to reduce expectations for a rate cut in November to 25 basis points.

The PPI report showed that service costs rose by 0.2%, lower than the 0.4% increase of the previous month. Prices excluding food and energy rose by 0.2% for the third consecutive month. Food wholesale prices increased by 1%, the largest increase since February of this year, while energy prices fell by 2.7%. The cost of processed goods for intermediate demand decreased by 0.8%, due to a significant drop in diesel fuel prices.

Futures contracts betting on the Federal Reserve's policy rate continue to suggest that there is only a 15% chance the Fed will keep the target range for short-term borrowing rates at the current 4.75%-5.00% at its early November meeting. Most are betting that the Fed will cut rates at its last two meetings this year and the first few meetings next year, with the range expected to drop to 3.50%-3.75% by mid-next year.