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Economists: Hot PPI shows Fed's work is not done
After a hotter-than-expected PPI, Wall Street estimates for core PCE are rising; forecasts now point to an acceleration from the August pace and imply greater odds of another Fed rate hike.
CNBC reports that a hotter-than-expected producer price reading is leading Wall Street to raise its estimates for the Fed’s preferred inflation gauge, core PCE, which is due later this month. It notes that estimates now show core PCE inflation rising to 0.32% (from 0.25% in August), implying an increase in the year-over-year core inflation rate to around 3.1% (up from 3.01% in August).
The PPI detail cited in the article shows a 1.3% monthly rise and a 6.3% year-on-year increase, described as the biggest monthly gain since March 2022. While the month was paced by a 20% rise in gasoline prices, CNBC stresses that prices also rose outside food, energy and trade services, with a 0.5% monthly gain and 5% year-on-year increase, suggesting the inflationary impulse is broader than energy alone.
The piece links these updated expectations to the near-term outlook for Fed policy, referencing commentary that “on the economic data alone” there is little reason for the Fed to hesitate. It also quotes differing views: recent Fed communication tempered expectations for back-to-back hikes, and the article cites Fed-futures probabilities that imply at least one hike by December, even as the probability for the end-of-month meeting is described as lower.
Traders should watch how the core PCE estimate evolves into the release date, and whether further price data reinforce the “broader” inflation message beyond energy.
Why this matters for FX
A stronger-than-expected PPI signals more persistent underlying inflation pressures, which feeds directly into expectations for the Fed’s next steps and the path of US real yields. That can tighten or ease overall US financial conditions, affecting USD funding and risk appetite, and therefore moves in USD pairs and safe-haven cross-rates.