US producer prices rose 5.4% in the 12 months through August, with the market probability of a September rate hike climbing to approximately 75% as traders respond to evidence that energy inflation is spreading through the producer pipeline. This represents a significant increase from the 70% probability before Thursday's data release, according to Investing.com reports. The inflation data came alongside signs that the labour market remains stable, with weekly unemployment insurance claims showing no major deterioration, giving policymakers more room to focus on persistent price pressures. Market pricing suggests traders increasingly expect at least one rate hike by year-end, with the possibility of two also reflected in expectations. The Fed has kept its policy rate in the 3.50% to 3.75% range since December as it tries to bring inflation back to its 2% target.
US wholesale inflation accelerated more than expected in August, with the Producer Price Index (PPI) rising 5.4 percent year-on-year, according to government data released Thursday. This represented a significant acceleration from the 4.8 percent rise in July and exceeded the 5.3 percent that economists expected in a consensus forecast published by MarketWatch. On a month-on-month basis, PPI rose by 0.4 percent, which was in line with analysts' expectations. The data shows that energy costs jumped by 4.2 percent over the month, with diesel fuel being the primary driver of this inflationary pressure. However, details of the report suggested some of the recent progress on inflation may be reversing, with prices for transportation and warehousing jumping in August, while hospital services and airfares also became more expensive. Strong demand linked to the surge in artificial intelligence investment pushed up prices for electronics, adding to evidence that inflationary pressure is not limited to energy.
Energy costs have surged dramatically, with diesel fuel costs jumping 24.1 percent in August, significantly boosting the overall inflation figures. According to the Labor Department report, energy costs jumped by 4.2 percent over the month, with diesel fuel being the primary driver. The costs of regular gasoline and diesel have risen since US-Israeli strikes targeting Iran in late February prompted Tehran to choke off the Strait of Hormuz in retaliation. The waterway is a crucial route for global energy transit, and the conflict has hit an impasse more than six months after it started. Diesel prices have rocketed to a new record in the United States this week, standing at a national average of $5.98 per gallon, significantly up from the year-ago average of $3.71 per gallon, according to the AAA motorists' association. The price of diesel, the fuel needed for road hauling and agriculture, continues to impact US households and businesses weeks ahead of key midterm elections.
The inflation data reveals that energy drove more than three quarters of the increase in final demand goods, with diesel prices surging 24.1% and accounting for more than one third of the monthly increase in final demand goods. According to Investing.com analysis, gasoline, jet fuel and home heating oil also moved higher, making the energy contribution considerably broader than a single crude contract. Transportation and warehousing prices increased 2.3%, while truck freight charges advanced 2%, with airline passenger services also rising. This shows the energy shock is beginning to travel beyond the commodity complex and into the broader economy. Final demand goods prices rose 1.1% in August, the largest increase since May, while final demand services advanced only 0.1%, the smallest increase since May. The core PPI, excluding food and energy, rose 0.2% in August against expectations for 0.3%, with the annual rate coming in at 4.6% and matching consensus estimates.
Rising diesel costs are squeezing US households and businesses weeks ahead of key midterm elections, creating pressure on President Donald Trump's administration. The conflict has hit an impasse more than six months after it started, with Trump under pressure to end fighting as the November midterm elections approach. Steeper costs for diesel used to fuel farm equipment have added to expenses over the fall harvest season, particularly affecting farmers who are among Trump's key supporters. Two-year Treasury yields jumped to 4.516%, their highest since 2024, as two-year yields move in lockstep with interest rate expectations. Traders now see a 69.8% chance the Federal Reserve will hike interest rates by at least 25 basis points next week, up from about 64% before Thursday's report, according to the CME FedWatch tool. The 30-year Treasury bond yield climbed to 5.35% on Thursday, hitting its highest level since 2007, reflecting broader market concerns about inflation and economic conditions.
