US PPI Inflation Surges to 5.4% Annual Rate in August
Producer prices jumped 0.4% in August, pushing annual inflation to 5.4% and raising the probability of a Federal Reserve rate hike to 70%.
The US producer price index rose 0.4% in August. This monthly gain pushed annual inflation to 5.4%, up from 4.8% in July. The data matched consensus forecasts but showed no progress toward disinflation. This outcome increased the likelihood of an interest rate hike next week.
The Bureau of Labor Statistics reported that final demand goods prices drove the overall increase. These prices advanced 1.1% after two consecutive months of declines. In contrast, final demand services prices rose only 0.1%. More than three-quarters of the total PPI increase came from energy costs.
Energy Costs Drive Wholesale Inflation
Final demand energy prices jumped 4.2% in August. This surge was primarily due to diesel fuel costs. Diesel prices spiked by more than 24% monthly. The increase reflects ongoing geopolitical tensions and higher crude oil prices.
Oil prices have moved back above $100 per barrel this week. Investors are pricing in higher inflation for a longer period. Core PPI, which excludes volatile food and energy items, rose 0.3% in August. This figure matches the annual growth rate of 4.7% seen in July.
Market Reaction Shifts Toward Tighter Policy
The probability of a Federal Reserve rate hike rose to 70%. This is up from 60% the previous day, according to CME FedWatch data. The benchmark federal funds rate has remained in the 3.5% to 3.75% range since last December. Treasury yields increased following the release of the data.
Two-year Treasury bill yields exceeded 4.5% by 10 a.m. EDT. Ten-year Treasury bond yields moved within eight basis points of the 5% threshold. This is the highest level for the ten-year yield since October 2023. These moves reflect expectations of higher short-term rates.
Services Inflation Continues to Climb
Services prices rose for the third consecutive month in August. Transportation and warehousing services increased by 2.3%. This reverses the contraction seen in July. Truck freight transportation prices gained 2%. Other services, including legal and hospital care, also posted gains.
The data suggests energy impacts are spreading to other sectors. The consumer price index report is scheduled for release Friday. The July CPI showed annual inflation of 3.4%, down slightly from 3.5% in June. The market awaits this final data point before the central bank meeting.
