Economists: Hot PPI shows Fed's work is not done

Key Points:

• Wall Street forecasts indicate an acceleration in the Federal Reserve's preferred inflation measure, the core personal consumption expenditures (PCE) index, following a stronger-than-expected producer price index (PPI) report showing a 1.3% monthly increase.
• The PPI's 6.3% year-over-year rise, the largest since December 2022, was driven largely by a 20% jump in gasoline prices, but underlying inflation excluding food, energy, and trade services also rose 0.5%, signaling broad inflationary pressures.
• Economists predict the core PCE inflation for September will increase by 0.32%, potentially raising the annual core inflation rate to 3.1%, which may prompt the Federal Reserve to consider additional interest rate hikes despite recent cautious comments from Fed officials.
• Fed futures show a 29% probability of a rate hike at the upcoming meeting but a 91% chance of at least one increase by December, reflecting market expectations of continued monetary tightening.
• The Federal Reserve favors the PCE index over the consumer price index (CPI) because it better reflects actual consumer spending habits and adjusts weightings as spending patterns change, making it a key gauge for inflation targeting.