Wholesale inflation rose higher than predicted in September, led by surging food prices. The Producer Price Index (PPI) — a measure of the change in selling prices domestic producers obtain for their output — rose 0.4% from the previous month. Compared to 12 months earlier, the PPI was up 8.5% in September, higher than the 8.4% economists had predicted.
Roughly 60% of September’s price increases stem from the 1.2% month-over-month climb in food prices. Within that category, the cost of fresh and dry vegetables surged by 15.7%.
The services index also helped drive overall inflation, rising 0.4% month-over-month in September, the fifth straight month of increases. Traveler accommodation service prices, in particular, jumped 6.4%.
Inflation persisting at multi-decade highs may prompt the Federal Reserve to pursue even more aggressive interest rate tightening. Despite five rate hikes this year — three of which were 75 basis points each — prices in the economy remained elevated. The latest report will only increase the likelihood of another significant rate jump at the Fed’s next meeting in November.
“This report does not yet have convincing evidence that inflation is cooling across the broad swath of the economy,” the chief economist at LPL Financial, Jeffrey Roach, said. “Expect to see the Fed recommit to fighting inflation at the risk of pushing the economy into recession.”
Lifting interest rates is an action the Federal Reserve can leverage to fight inflation, but it can ultimately drive unemployment higher as businesses tend to borrow and invest less. While unemployment is not desirable, according to the Fed, their policy will prevent potentially “far greater economic pain.”
Higher interest rates also serve as a headwind for the stock market. Amid numerous rate hikes this year, the S&P 500 has lost nearly a quarter of its value year-to-date.
The United States is by no means the only country aggressively lifting rates. Last week the United Nations warned that central bank activity around the world risks harming the global economy. According to a report issued by the collective, “The world is headed towards a global recession and prolonged stagnation unless we quickly change the current policy course of monetary and fiscal tightening in advanced economies.”
The risk of economic harm is even greater for developing countries. As rates rise, servicing debt payments becomes increasingly demanding. The UN warned that “alarm bells are ringing most” for these countries sitting on substantial debt levels.
According to Bill Adams, chief economist for Comerica Bank, interest rates are not significantly elevated by historical standards. Still, with substantial outstanding debt worldwide, he expects interest rate hikes to slow the economy “much more than they used to.”
