Producer-Price Report Boosts Rate Hike Probability to 70%

The Federal Reserve's upcoming meeting has become increasingly uncertain due to Thursday's producer-price report. The report showed wholesale prices rose 5.4% from a year earlier in August, pushing the probability of a quarter-point rate hike to roughly 70%, up from about 65% before the report.

While the headline increase was largely expected, the trouble lies beneath it. Transportation and warehousing costs jumped alongside hospital services and airfares, while renewed disruption to global oil supplies and extraordinary AI-related demand for electronics suggested some of the recent improvement in inflation may be reversing.

The Fed has kept its benchmark rate at 3.50% to 3.75% since December, waiting to see whether that restraint would be enough to finish the job. However, with the burden of proof now shifting towards proving cooling inflation rates, the decision for Federal Reserve Chairman Kevin Warsh is becoming increasingly difficult.

The consumer-price report on Friday will provide the missing half of the inflation picture and help economists estimate the Fed's preferred PCE measure, which has remained above the central bank's 2% target long after policymakers expected the last inflation cycle to be over. Capital Economics thinks Thursday's numbers make a rate increase this year increasingly difficult to avoid.