US PPI growth slows down, market expects the Fed to cut interest rates by another 1 percentage point in November

The U.S. Producer Price Index (PPI) saw a continued decline in September, reinforcing expectations that inflationary pressures are easing. Economists and market observers now anticipate that the Federal Reserve will lower interest rates by a quarter point in November.

On October 11, the U.S. Department of Labor reported that the overall PPI for September remained unchanged from August, falling short of the expected increase of 0.1% and down from August’s 0.2% rise. Compared to the same period last year, the PPI increased by 1.8%, slightly above the expected 1.6%, but the August figure was revised upward to 1.9%, making September’s annual increase the smallest since February of this year. Notably, food prices surged by 1%, marking the largest increase since February, while energy costs dropped significantly by 2.7%.

When excluding food and energy, the core Consumer Price Index (CPI) rose by 0.2% from August, in line with expectations but lower than August’s 0.3% increase. The year-on-year increase for September stood at 2.8%, exceeding the anticipated 2.6% and August’s figure of 2.4%. Within this category, service prices experienced a 0.2% monthly rise, down from 0.4% the prior month, while core product prices recorded a 0.2% increase for the third consecutive month.

Furthermore, when food, energy, and trade are excluded, the double-core PPI saw a slight rise of 0.1% from August, which was below both the forecast and the previous month’s increase of 0.2%. Year-on-year, it rose by 3.2%, falling short of August’s 3.3% increase.

Despite the annual increase in the PPI, economists do not believe this indicates accumulating inflationary pressures due to a noticeable decline in housing costs in September.

Three components of the PPI report are integrated into the Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) price index. Changes in primary healthcare and outpatient costs remained relatively stable, while airfare prices rebounded significantly, and asset management fees showed a slight acceleration in growth.

The Consumer Price Index (CPI) report released on October 10 suggested a slight stickiness in inflation. However, three Federal Reserve officials have downplayed concerns raised by the CPI report, asserting that the Fed can still continue to lower interest rates.

John Williams, President of the New York Federal Reserve, spoke at an event at Binghamton University, stating, “Monthly data can fluctuate, but we have observed a fairly stable downward trend in inflation, and I expect this trend to continue.” He remarked that it would be appropriate to gradually shift the monetary policy stance towards a more neutral level over time.

Similarly, Chicago and Richmond Federal Reserve Presidents Austan Goolsbee and Thomas Barkin noted that the overall trend of inflation in the U.S. is clearly on the decline.

In contrast, Raphael Bostic, President of the Atlanta Federal Reserve, mentioned that his projections from last month’s interest rate meeting indicated the possibility of one more rate cut this year. He expressed, “I’m completely willing to skip a meeting if the data supports it,” and regarding the potential pause in rate cuts in November, he affirmed, “I’m certainly open to that.”