U.S. September PPI unchanged, Fed's 25 basis point rate cut next month "a done deal"?

The U.S. PPI remained flat in September, with a decrease in gasoline prices restraining the price increase, indicating a further easing of inflation and supporting the view that the Federal Reserve will cut interest rates again next month.

A report released by the U.S. Bureau of Labor Statistics on Friday showed that the month-on-month growth rate of the September PPI was the same as in August, when the index rose by 0.2% month-on-month. The September PPI rose by 1.8% year-on-year, the smallest increase since February this year.

Many economists prefer to use an index with lower volatility to exclude the impact of food, energy, and trade. This index rose by 0.1%, the smallest increase since May 2023.

The PPI data follows the more closely watched CPI data, which showed that driven by increases in housing, food, and clothing prices, inflation in September's CPI was slightly higher than expected.

Federal Reserve officials will consider these two reports in planning their path to lower interest rates. Economists often analyze categories in the PPI data that are related to the Fed's preferred inflation measure (PCE price index), but the performance of these categories is mixed.

The September PPI report showed that doctor and hospital outpatient care costs remained almost unchanged, while airline ticket prices rebounded significantly. Investment management fees increased slightly. Service costs rose by 0.2%, slowing from the 0.4% increase in the previous month. Wholesale food prices rose by 1%, the largest increase since February, while energy prices fell by 2.7%.

The September PCE price index will be released later this month.

Following the release of the PPI data, U.S. Treasury yields continued to rise, with traders expecting the Fed to cut rates by 25 basis points next month.

The Fed initiated rate cuts last month, lowering rates by 50 basis points, as inflation cooled in recent months and wage growth slowed. Subsequently, reports showed a significant increase in job positions and continued price pressures, prompting economists to lower their expectations for a 25 basis point rate cut in November.

The PPI report showed that service costs rose by 0.2%, lower than the previous month's 0.4% increase. Prices excluding food and energy rose by 0.2% for the third consecutive month. Wholesale food prices rose by 1%, the largest increase since February this year, while energy prices fell by 2.7%. The cost of processed goods for intermediate demand fell by 0.8% due to a significant drop in diesel fuel prices.

Futures contracts betting on the Fed's policy rate continue to suggest that there is only a 15% chance that the Fed will maintain its short-term lending rate target within the current range of 4.75%-5.00% at its meeting in early November. Most are betting that the Fed will cut rates at its last two meetings this year and in the initial meetings next year, bringing it down to the range of 3.50%-3.75% by mid-next year