Inflation Has Escaped the Gas Station

September’s inflation reports highlight a significant increase in gasoline prices, but unfortunately, it seems that inflation is picking up pace beyond just the energy sector.

The Labor Department announced on Thursday that the producer price index (PPI) surged by 1.3 percent last month, marking the largest spike since March 2022 and a 6.3 percent increase for the year. Just a day after the consumer price index (CPI) revealed an inflation rate of 3.7 percent, this development might bring back some unsettling memories of the earlier stages of the Biden administration.

It’s Not Just Gasoline and Oil Anymore

The prices of goods measured by the producer price index climbed 2.6 percent in September, showing a year-over-year rise of 9.8 percent. It’s important to note that over 80 percent of this increase was driven by energy, which saw a 10.8 percent hike. Specifically, gasoline prices alone contributed to half of the total goods increase, soaring by 20.3 percent. Diesel prices for intermediate demand increased by 21.0 percent, which explains why the transportation and warehousing price index rose 3.4 percent just in September. Over the past year, prices in transportation and warehousing have jumped by 16.0 percent.

Yet, even when we exclude food and energy from the goods measurement in the PPI, the monthly increase was still pretty high at 0.3 percent. For the year, core goods prices have risen by 5.1 percent, maintaining a year-over-year index above five percent for five consecutive months.

Additionally, prices for durable consumer goods have increased by 3.6 percent from last year and registered a 0.3 percent rise in September, while the CPI report earlier indicated a larger inflationary movement for durables, with a 0.9 percent increase last month, though year-over-year figures remained flat.

The PPI also monitors a specific index for personal consumption goods, excluding energy, which saw a 0.4 percent increase in September, though it only reflects a 1.7 percent rise from the previous year.

Service prices increased by 0.8 percent last month, totaling a 4.9 percent rise from a year ago. If we ignore trade services, transportation, and warehousing, the monthly services increase drops down to 0.3 percent, with an annual rate of 3.8 percent.

Core PPI, which omits food and energy, increased by 0.7 percent—more than double the expected 0.3 percent from economists. The measure excluding food, energy, and trade services increased by 0.5 percent, reflecting a 5.0 percent increase over the year.

In summary, the economy seems to be facing a significant inflationary event that’s affecting broader sectors.

After the CPI and PPI data releases, estimates suggest that September’s personal consumption expenditures price index might rise by approximately 0.51 percent, according to insights from the Wall Street Journal’s Nick Timiraos, which is a notable increase from August’s 0.31 percent. Core PCE prices are anticipated to rise around 0.34 percent for the month, higher than August’s 0.25 percent. This could elevate the PCE inflation annual rate to about 3.6 percent and the core rate to 3.1 percent.

These figures will be revealed the day after the Federal Reserve’s next meeting, though officials likely have a good sense of where the index is moving.

Consumers Are Still Buying

Interestingly, the high gasoline prices haven’t significantly deterred American shoppers. Retail sales rose by 0.8 percent in September and were up 6.3 percent compared to the prior year. Adjusting for the monthly CPI increase suggests that real sales might have risen about 0.2 percent.

A significant portion of that growth can be attributed to gas station sales. However, excluding gas stations, retail sales only rose by 0.2 percent in September, reflecting a 4.5 percent year-over-year increase.

There are signs of strong performance within these overall figures. Grocery store sales increased by 0.5 percent, even though grocery prices dipped slightly according to CPI. Furniture store sales saw a 1.3 percent rise despite a 0.8 percent decline in furniture and bedding prices. Sales in electronic stores rose by 0.6 percent, and health and personal care stores experienced a 0.7 percent increase. Additionally, bars and restaurants saw sales grow by 1.1 percent, outpacing the 0.2 percent price growth noted in the CPI.

Regional Fed factory surveys also indicate ongoing expansion. The Empire State manufacturing index surged to 25.5 from 7.6, its strongest number in nearly five years, with a notable increase in new orders. Meanwhile, the Philly Fed’s index remained positive at 20.9, despite a decline from September, indicating a slowdown in new orders. It appears factories are feeling the pressure but are not retreating collectively.

This underlying strength, however, may suggest it will be easier for the Fed to decide on rate hikes. An energy shock combined with falling demand would provide a clearer rationale to hold off. But ongoing consumer spending and factory growth will likely enhance their confidence in managing higher interest rates.