US producer prices rise in line with expectations in August as energy costs climb

US producer prices rose in line with expectations in August, driven by a rebound in energy costs.

The Labor Department’s Bureau of Labor Statistics said on Thursday that the Producer Price Index (PPI) for final demand rose 0.4% last month, following an upwardly revised 0.1% increase in July.

Economists polled by Reuters had forecast the PPI would rise 0.4%, following a previously reported unchanged reading in July.

In the 12 months through August, producer prices increased 5.4%, following a 4.8% rise in July.

Energy prices jumped 4.2% during the month as renewed hostilities between the United States and Iran drove oil prices higher. Energy prices had declined for two consecutive months.

Wholesale food prices edged up 0.1% after falling 0.9% in July.

Prices for goods jumped 1.1%, while they rose 0.4% when the volatile food and energy components were excluded.

Services prices edged up 0.1%, although some components recorded strong increases.

The Federal Reserve tracks the Personal Consumption Expenditures (PCE) price indexes for its 2% inflation target.

Some components of the PPI feed into the calculation of PCE inflation. Starting in August, however, the government began making changes to the way prices are calculated for volatile portfolio management and investment advisory services, legal services, and computer software and accessories, altering the PPI’s impact on PCE inflation.

The portfolio management component, which has contributed to significant volatility in the PCE price index excluding food and energy, will be replaced by an extrapolated estimate.

“At the same time, new PPI-based estimates for household legal services and computer software will be added. As a result, we will have less confidence than usual in how the PPI data translate into their contribution to the August PCE price index,” said Lou Crandall, chief economist at Wrightson ICAP.

PCE inflation data could be revised lower

Economists at Morgan Stanley said the methodological changes could result in downward revisions to PCE inflation data for the first four months of the year, although they are unlikely to materially alter the figures for the period from May through August.

“As a result, we estimate that the 12-month and six-month annualized rates of core PCE inflation through July could be revised down to around 3.1% and 3.2%, respectively, from the current 3.3% and 3.5%,” the economists wrote in a note.

“Given that we do not expect material revisions to the monthly readings from May through July, the three-month annualized pace through July is likely to remain broadly stable at around 3.0% to 3.1%.”

Some Federal Reserve officials are focusing on the three-month change in PCE inflation.

The Bureau of Economic Analysis is scheduled to publish updated PCE inflation data, alongside annual revisions to gross domestic product figures, on September 30.

With inflation remaining above target and the labor market regaining balance in August, some economists said the Federal Reserve should raise interest rates next week to reinforce its independence.

They said uncertainty over what the US central bank will decide has contributed to the rise in long-term Treasury yields.

“Federal Reserve Chair Kevin Warsh’s hawkish Jackson Hole speech leaves him little room to maneuver at the upcoming meeting. If he wants to maintain his inflation-fighting credibility with the bond market, he will have to act if all the data, particularly inflation, are pointing in the same direction, toward a rate hike,” said Scott Anderson, chief economist at BMO Capital Markets.

Ahead of the PPI report, financial markets saw around a 62% probability of a 25-basis-point rate hike at the Federal Reserve’s September 15-16 meeting, according to CME’s FedWatch Tool.

The central bank’s benchmark overnight interest rate currently stands in a range of 3.50% to 3.75%.