Hotter producer prices strengthen bets on a Fed rate hike

A hotter reading in US producer prices has strengthened bets that the Federal Reserve could raise interest rates as early as next week, with traders now pricing in roughly a 70% chance of a quarter-point hike, according to a Reuters report.

Producer prices rose 5.4% in the 12 months through August. While the overall increase was in line with economists' expectations, details of the report suggested some of the recent progress on inflation may be reversing.



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Prices for transportation and warehousing jumped in August, while hospital services and airfares also became more expensive. Strong demand linked to the surge in artificial intelligence investment pushed up prices for electronics, adding to evidence that inflationary pressure is not limited to energy.

The Fed has kept its policy rate in the 3.50% to 3.75% range since December as it tries to bring inflation back to its 2% target.

Friday's inflation data could decide the move

The next major test comes on Friday with the release of US consumer inflation data. The report could determine whether Thursday's producer-price figures are strong enough to influence the Fed's decision at its September 15-16 meeting.

"With the PPI data overall still looking relatively hot, the Fed seems likely to hike this year even if it doesn’t pull the trigger this month," Capital Economics analysts wrote. As for next week's decision, they said, "that still depends on the more important core CPI figure tomorrow."

Before Thursday's data, traders had priced in about a 65% chance of a quarter-point hike next week. That probability has since risen to around 70%, based on Fed funds futures contracts traded at CME Group.

The inflation data also came alongside signs that the labour market remains stable, with weekly unemployment insurance claims showing no major deterioration. That could give policymakers more room to focus on persistent price pressures.

Oil raises another inflation concern

The inflation outlook is also being complicated by renewed hostilities in the Middle East, which have disrupted global oil distribution and pushed Brent crude above $100 a barrel.

Higher energy prices could add to inflation just as the Fed assesses whether price growth is moving sustainably towards its 2% goal.

The Fed targets inflation through the Personal Consumption Expenditures Price Index, which can be estimated using CPI and PPI data. Analysts were divided on Thursday over whether the latest producer-price figures would push PCE inflation high enough to force a hike next week.

Still, market pricing suggests traders increasingly expect at least one rate hike by year-end, with the possibility of two also reflected in expectations.

The European Central Bank raised its key interest rates earlier on Thursday to contain inflation linked to the Iran war, which has helped push Brent prices above $100 a barrel.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)