US producer prices rose 1.3% in September. That was the largest monthly gain since March 2022. The Bureau of Labor Statistics published the number on October 15. Economists polled by Dow Jones had expected 0.6%.
The report is called the producer price index, or PPI. The bureau uses it to track the prices businesses receive for what they sell, before goods and services reach a store shelf. The consumer price report for September came out one day earlier. A reader who puts the two reports side by side can see inflation at two stages of the same supply chain.
The PPI, defined
In the PPI, the bureau records the price a seller collects. A steel mill selling coils to a carmaker counts. So does a trucking firm billing a retailer. A wholesaler, a firm that sells in bulk to other businesses, counts when it sells a pallet of cereal to a grocery chain.
The main figure in the report is called "final demand." It covers goods and services sold to their last buyer. The buyer can be a household, a company buying equipment, a government agency or a customer abroad.
The consumer price index, or CPI, starts from the other end of the chain. It covers what households pay at the register for rent, groceries, haircuts and car insurance. A price change tends to show up in the PPI before the CPI. A business pays more before it decides whether to raise its own prices.
Inside September's 1.3%
The Bureau of Labor Statistics splits final demand into two parts. Goods prices rose 2.6% in September. Services prices rose 0.8%. Energy is part of goods. Its prices rose 10.8% in a single month.
Bar chart of September producer price changes: final demand 1.3%, goods 2.6%, services 0.8%, energy 10.8%
Energy feeds into the cost of most other things. Fuel moves trucks, ships and planes. Electricity runs factories, warehouses and data centers. A business that pays more for power and diesel faces a choice. It can raise its own prices or accept a thinner profit on each sale.
Economists track a second measure called "core" PPI. Core leaves out food and energy. Those prices have large swings from month to month. Core PPI rose 0.7% in September. Over 12 months, core was up 5%. Prices outside food and energy climbed, so the increase reached beyond fuel.
The 12-month figure for final demand was 6.3%, the largest annual gain since December 2022. The Dow Jones forecast was 5.5%. The bureau applies no seasonal adjustment to this yearly figure. Statisticians use seasonal adjustment to strip out normal calendar swings, such as holiday shopping. In the unadjusted figure, raw prices sit beside prices from the same month a year earlier.
Producer prices versus consumer prices
In the September CPI, consumer prices were up 3.7% from a year earlier. Core CPI leaves out food and energy, like core PPI. It rose 0.3% in the month. Both reports cover the same month, yet producer prices rose faster.
Each index has its own basket, the set of items it prices. The PPI includes items outside normal household shopping, such as industrial chemicals, freight and factory machines. Housing costs carry heavy weight in the CPI. Housing as a household expense sits outside the PPI.
The two reports differ in timing. Many businesses sign supply contracts months in advance. A store may be selling inventory, the stock it holds, that it bought at older prices. A cost increase at the factory can take months to reach the price tag. If companies absorb part of the increase, shoppers do not pay that part.
Absorbed costs matter to stock investors. A company's margin is the share of each sale it keeps as profit. If companies swallow higher costs, consumer prices stay calmer but margins shrink. If they pass costs on, margins hold up and consumer inflation rises. A reader of the PPI cannot see which path a company picks. Investors find the answer in company earnings reports, where firms publish their profits, and in future CPI readings.
Bond yields fell after a high reading
A bond yield is the yearly return an investor earns for lending money through a bond. The 10-year yield is the interest rate the US government pays to borrow for 10 years. Investors tend to push yields up after an inflation surprise.
Investors ask for a higher yield when they expect inflation to eat into future payments. They ask for more when they expect the Federal Reserve, the US central bank, to keep its interest rates high.
A basis point is one hundredth of a percentage point, so 100 basis points make one percentage point. On October 15 the 10-year yield fell 10.1 basis points to close at 5.089%. Over the five trading sessions to that close, the yield fell 14.2 basis points.
Line chart of the US 10-year Treasury yield over the five sessions to October 15, when it closed at 5.089%
Bond prices and yields move in opposite directions. Buyers who rush into Treasuries, the bonds the US government issues, push prices up and yields down. A rally is a run of buying that lifts prices. A selloff is a run of selling that drags prices down. Bloomberg reported that Treasuries led a global bond rally on October 15 as a selloff in artificial-intelligence shares deepened. According to that report, investors wanted shelter from a possible slowdown in economic growth.
Buyers pushed European government bond prices up the same day. The UK 10-year yield fell 4.1 basis points to 5.379%. France's fell 6.7 basis points to 4.794%. Germany's fell 3.0 basis points to 3.412%.
Investors weighed the Fed's next move. Money markets are where investors lend and borrow cash for short periods. Investing.com reported that, after the CPI report, traders there saw an "overwhelming probability" of steady rates at the late-October Fed meeting. The Fed's rate-setting group is the Federal Open Market Committee, or FOMC. It meets on October 27-28.
Investors weigh each data release against the rest of the day's news. Bloomberg tied the October 15 bond rally to the stock selloff and to demand for safety. By that account, investors took their direction for bonds from the stock selloff that day.
Clues for the next CPI reports
Through the PPI, a reader can see cost pressure building inside the supply chain. A reader can use it to pick the lines of the next consumer reports that deserve a close read.
Start with energy. After a 10.8% monthly jump in producer energy prices, the gasoline, heating and electricity lines in the CPI deserve attention.
Goods are the second place to look. Producer goods prices rose 2.6% in September. The CPI's core goods lines, meaning goods other than food and energy, include furniture, apparel and cars. In those lines, a reader can see whether stores pass the costs on.
Services prices change at a slower pace. Producer services prices rose 0.8%. Freight, warehousing and travel costs can feed into consumer items such as airfares and delivery fees over the following months.
Core deserves its own look. Core PPI rose 0.7% in September, while core CPI rose 0.3%. A gap like that can close from either side. Consumer prices can rise, or company margins can shrink.
Dates on the calendar
- October 27-28: The FOMC meets and announces its rate decision.
- November 13, 8:30 a.m. Eastern Time: The Bureau of Labor Statistics releases the October PPI.
- December 8-9: The FOMC meets again.
Investors can use the PPI as an early read on business costs. Bond holders feel its effect through inflation expectations and the Fed. Stock holders feel it through margins. A reader who sets the PPI beside the CPI can see whether costs are stuck in the supply chain or reaching shoppers.
Sources
Not investment advice.