WRAPUP 1-US producer prices post largest gain in 4-1/2 years; retail sales beat expectations

US producer prices increased by the most in 4-1/2 years in September ​amid rising costs for goods and services, the latest indication of inflation broadening out beyond energy products. The ‌report from ​the Labor Department on Thursday also showed large rises last month in key components that go into the calculation of the main inflation measures tracked by the Federal Reserve for its 2% target, leading some economists to anticipate another interest rate increase this month.

Financial markets, however, continued to expect the next rate hike only in December. The government on Wednesday reported a broad increase in consumer prices in September. Inflation is being driven by the dragging US-Israeli war with ‌Iran, which is keeping oil prices elevated. Rising gasoline prices helped to boost retail sales in September, though the underlying trend in spending slowed, other data showed on Thursday. "We expect the Federal Reserve to raise rates at their meeting at the end of the month, as stickier inflation and a solid labor market convince officials that they need to move sooner than markets anticipate," said Matthew Martin, a senior US economist at Oxford Economics.

The Producer Price Index for final demand jumped 1.3% last month, the largest gain since March 2022, after an upwardly revised 0.5% rise in August, the Labor Department's Bureau of Labor Statistics said. Economists polled by Reuters had forecast ‌the PPI increasing 0.5% after a previously reported 0.4% gain in August. In the 12 months through September, the PPI soared 6.3%, the biggest rise since December 2022. That followed a 5.6% advance in August.

Producer goods prices increased 2.6%, the largest increase since the government started tracking the series in December 2009. ‌A 10.8% surge in energy prices accounted for more than 80% of the broad-based rise in goods prices. Gasoline prices rose 20.3%. There were also increases in the prices of diesel, jet fuel and residential electric power. Wholesale food prices rebounded 1.2% after declining for three straight months. Most food is transported by trucks and last month's jump could be an early sign of the effects of record diesel prices spilling over to the broader economy.

Excluding the volatile food and energy components, producer goods prices rose 0.3%. The so-called core goods gained 0.4% in August. Services prices shot up 0.8% after climbing 0.2% in the prior month. A 1.4% surge in margins for trade services accounted for nearly half of the broad-based increase in services prices. There were also increases in the costs of ⁠transporting freight by road. ​Hotel and motel room prices shot up 5.6% while airfares jumped 5.0%. But margins ⁠for automotive fuels and lubricants retailing plunged 30.3%.

FIRMER PCE INFLATION READING EXPECTED Prices for securities brokerage also fell. Hotel and motel rooms as well as airfares are key components in the Personal Consumption Expenditures price indexes.

Economists estimated that core PCE inflation increased 0.35% in September, which could round up to 0.4%. That would translate to a year-over-year increase of 3.1%. Core PCE inflation gained 0.2% in ⁠August and advanced 3.0% on a year-over-year basis. Financial markets saw a roughly 30% chance of a rate increase at the Fed's October 27-28 policy meeting, CME Group's FedWatch Tool showed. The odds of a rate increase were reduced by underwhelming payroll gains in September as well as cooler-than-expected PCE inflation readings for July and August.

The Fed in September raised ​its overnight benchmark interest rate by 25 basis points to the 3.75%-4.00% range. US stocks fell, with the Nasdaq Composite near one-month lows. The dollar eased against a basket of currencies. US Treasury yields slipped.

In a separate report, the Commerce Department's Census Bureau said retail sales rose 0.8% in ⁠September after an upwardly revised 1.3% jump in August. Economists had forecast retail sales, which are mostly goods and are not adjusted for inflation, rising 0.3% after a previously reported 1.1% advance. Receipts at service stations surged 6.4%. Sales at auto dealerships rose 0.2%.

There were also increases in receipts at furniture, electronics and appliance stores as well as online retailers. Sales at food services and drinking places, the only services ⁠component ​in the report, increased 1.1% after rising 1.4%. But there were decreases in sales at building material and garden equipment suppliers as well as sporting goods, hobby, musical instrument and book stores. Receipts at miscellaneous store retailers dropped 3.0%.

The oil price shock is putting a strain on consumers, especially those in the lower part of what economists call a K-shaped economy. Inflation-adjusted wages fell again in September. Though consumers have continued to spend, higher-income households are doing the heavy lifting, and the stock market selloff poses a downside risk. Retail sales excluding automobiles, gasoline, building materials and food services edged up 0.1% last month after surging 1.2% in August, ⁠the Census Bureau said. Economists had forecast these so-called core retail sales, which correspond most closely with the consumer spending component of gross domestic product, to gain 0.3%.

Economists expect that consumer spending grew at around a 3.4% annualized rate in the third quarter after rising at a 3.8% pace in the April-June ⁠quarter. Growth estimates for the July-September quarter are around a 3.0% rate. The economy ⁠grew at a 2.2% pace in the second quarter. A third report from the Labor Department showed initial claims for state unemployment benefits rose 1,000 to a seasonally adjusted 199,000 for the week ended October 10.

It was the fifth straight week that claims remained below the 200,000 level, consistent with what economists said was a "low-hire, low-fire" labor market. The labor market is being anchored by low layoffs, with the hiring side sluggish as employers deal with what economists call headwinds ‌from tariffs and the Middle East conflict.

The claims report ‌showed the number of people receiving unemployment benefits after an initial week of aid, a proxy for hiring, fell 4,000 to a seasonally adjusted 1.710 million ​during the week ended October 3.