WRAPUP 2-US producer prices rise moderately in October, but inflation broadens out

US producer prices ​rose moderately in October, but inflation at the factory gate posted its largest annual gain in ‌four ​years, supporting the view that the Federal Reserve could continue raising interest rates after next month's widely expected hike. Despite the better-than-expected monthly reading reported by the Labor Department on Friday, there were more signs of inflation broadening out beyond energy goods, with food prices increasing by the most in eight months as expensive diesel raised transportation costs. Prices of goods excluding food and energy logged their biggest gain since May.

"There ‌is no silver lining in the report," said Christopher Rupkey, chief economist at FWDBONDS. "It looks like consumers will be on the hook for a fresh burst of consumer inflation. Everywhere you look inflation is pushing forward and making the affordability crisis for Americans that much harder." The Producer Price Index for final demand rose 0.3% last month after an upwardly revised 1.4% surge in September, the Labor Department's Bureau of Labor Statistics said. Economists polled by Reuters had forecast the PPI climbing 0.4% after a previously reported 1.3% jump in September.

The PPI shot up 6.5% year-over-year in October, ‌the largest annual gain since November 2022, after advancing 6.3% in September. The report followed news this week of a stronger-than-expected increase in consumer prices in October. Producer prices over the month were lifted by a 0.5% rise in goods prices. Food prices vaulted 1.3%, the ‌biggest increase since February, driven by fresh and dry vegetables, chickens, turkeys and beef as well as dairy products, confectionery goods and roasted coffee. Prices for basic organic chemicals increased 3.9%. Energy prices dipped 0.1%, amid a 7.9% decline in diesel fuel. Still, diesel fuel prices soared 115.2% on a year-over-year basis in October.

"The diesel shock is still working its way through the economy even as those prices have eased into November," said Joseph Brusuelas, chief economist at RSM. "Food prices are going to cause a further upset in consumer sentiment as they rise into the holidays and well into 2027." The artificial intelligence infrastructure buildout is also exerting pressure on inflation. Prices for electronic components and accessories increased 4.2% ⁠over the month ​and accelerated 31.7% on a year-over-year basis. Though electronic computers and computer equipment ⁠prices were unchanged, they surged 21.4% in the 12 months through October.

Excluding food and energy, producer goods prices increased 0.5% after gaining 0.3% in September. These so-called core goods prices accounted for more than 60% of the rise in overall producer goods prices last month. Goods prices advanced 10.2% in the 12 months through October, the biggest ⁠gain in four years. Stocks on Wall Street were trading lower as Nvidia CEO Jensen Huang's resignation on Thursday continued to depress investor sentiment. The dollar advanced versus a basket of currencies. US Treasury yields rose, with the yield on the interest-rate-sensitive two-year note on track for the largest weekly increase in over two ​years.

TRANSPORTATION COSTS RISE Services increased 0.2% after accelerating 1.0% in September. These prices have now risen for five straight months. A 2.0% increase in transportation and warehousing services costs, mostly freight transportation by road, accounted for three-quarters of the rise in services inflation. ⁠The cost of transporting freight by trucks accelerated 3.9%.

Prices for fuels and lubricants retailing, health, beauty and optical goods retailing as well as food and alcohol wholesaling increased strongly last month. Hospital outpatient care prices rebounded 0.8%. Hotel and motel room prices increased 2.5%, while the cost of legal services fell 0.2%. Airfares dropped 1.2% even as jet fuel prices rose. Airfares, ⁠legal ​services, hotel and motel rooms are among the key components that go into the calculation of the Personal Consumption Expenditures price indexes, the inflation measures tracked by the US central bank for its 2% target.

Following the PPI data, economists trimmed their estimates for the increase in October core PCE inflation to around 0.3% from about 0.35% after the CPI report. That would mark the third straight monthly increase of 0.3% in the core PCE price index, leading some economists to argue that the Fed was falling behind the curve in the fight against ⁠inflation. Most argue monthly gains of 0.2% or less over a long period are needed to bring inflation back to the Fed's 2% target. In the 12 months through October, they forecast core PCE inflation advancing 3.2% after rising 3.1% in September.

Strong consumer inflation readings together ⁠with comments from US central bank Governor Christopher Waller have left financial markets ⁠wavering between pricing in a 25-basis-point rate hike in December and leaving room for a half-a-percentage-point increase. Financial markets anticipated another increase in borrowing costs in January, CME's FedWatch tool showed. The Fed left its benchmark overnight interest rate in the 3.75%-4.00% range last month.

"Fed funds have to end up at least 100 basis points over current inflation metrics to restrain demand, create some slack and stabilize prices," said Carl Weinberg, chief ‌economist at High Frequency Economics. "If we are correct, ‌that promises quite a few 25-basis-point rate hikes in 2027 on top of whatever the committee decides to do at its next meeting."