Markets
Wholesale Prices Jumped 1.3% in September, the Most Since 2022. Bonds Rallied Anyway
The producer price index (PPI) rose 1.3% in September and 6.3% from a year earlier, far above the 0.6% and 5.5% expected. Treasury yields still fell the most since February, because gasoline did most of the damage.
A day after a hotter-than-expected consumer price report, the producer side delivered a bigger surprise. The Bureau of Labor Statistics said on October 15 that its producer price index for final demand rose 1.3% in September, the largest monthly increase since March 2022, after a 0.5% rise in August. Over twelve months, wholesale prices are up 6.3%. Economists had expected 0.6% for the month and 5.5% for the year.
The detail explains why markets shrugged. Energy prices charged by producers rose 10.8% in the month, and gasoline alone jumped 20.3%. Prices for final-demand goods rose 2.6%, services 0.8%. Strip out food, energy and trade margins — the measure the Federal Reserve watches most closely at the wholesale level — and prices rose 0.5% in the month and 5.0% over the year. That is still high, but it is not a 1.3% world. On the other side of the ledger, chicken egg prices fell 39.7%.
The bond market's reaction was the opposite of what a hot inflation number usually brings. The 10-year Treasury yield fell to 5.09%, its lowest close since September 22, and the 30-year yield dropped about 10 basis points to 5.43%, according to Yahoo Finance both on course for their biggest daily declines since February. The iShares 20+ Year Treasury Bond ETF (TLT) rose 1.37% to $79.97, its sixth straight gain and highest close since September 23.
Two things drove that. First, the inflation surprise was concentrated in fuel, which the Fed tends to look through, as it did with Wednesday's CPI. Second, the retail sales report released at the same time showed that, once gasoline is excluded, consumer spending barely grew in September — a sign that higher prices are starting to squeeze demand rather than feed on it. Lower growth means less need for the Fed to keep raising rates beyond what is already priced for the October 28 meeting.
Stocks followed the bonds rather than the headline. The Dow rose 1.08% to its highest close in a month, the S&P 500 0.33%, and the dollar index fell 0.54%. The next inflation reading is the Fed's preferred one, the PCE index for September, due with third-quarter GDP on October 29, the day after the Fed decides.