Wholesale inflation surged in September, keeping affordability in focus ahead of the midterms

By Alicia Wallace, CNN

(CNN) — US wholesale inflation jumped in September to its highest level in more than four years, marking the second hotter-than-expected inflation reading this week and adding to concerns about the economy just weeks before the midterm elections.

The Producer Price Index rose 1.3% from the month before and 6.3% from the year before, according to Bureau of Labor Statistics data released Thursday morning. It’s a sharp upswing from August when wholesale prices rose 0.5% to an annual rate of 5.6%.

The latest PPI landed a day after September’s Consumer Price Index report, which similarly showed that inflationary pressures were broadening. Sharply rising gas prices lifted the overall CPI to a 3.7% annual rate; but excluding gas and food, a closely watched gauge of underlying inflation heated up to 2.6% from 2.4%, underscoring that a variety of categories are experiencing price pressures.

The reports of accelerating price hikes come just weeks before the midterms, where affordability – or lack thereof – is expected to factor in heavily for US voters.

Economists had expected September PPI to increase 0.5% from August and 5.3% annually, according to FactSet. Instead, September marked the fastest monthly increase since March 2022 and the highest annual rate since December 2022, the year when US inflation hit a 40-year high.

Energy prices, driven higher by geopolitical conflicts including the war with Iran, drove September’s increase, accounting for 80% of the 2.9% leap in goods prices. That’s the largest-ever monthly increase, according to BLS data that goes back to 2009.

However, businesses are contending with price pressures beyond energy. Core PPI, which strips out food and energy, rose at 0.7%, its fastest rate in five months, lifting the annual rate to 5%, its highest since January 2023.

High energy prices spread

A collection of fuel-sensitive transportation-related categories, including airfares, were largely behind the lift in core wholesale inflation, said Oliver Allen, senior US economist at Pantheon Macroeconomics. Services-related price hikes were more muted as well when stripping out transportation, warehousing and trade services (a category that measures margins for retailers and wholesalers), he added.

“I don’t think the details are as ugly as the topline headline and core numbers suggest,” he said. “But they’re still not great.”

Higher energy prices are still working their way through the economy, he added. Prices for finished consumer goods (excluding food and energy), which rose 0.2% from August, are expected to continue climbing in the coming months, he said.

PPI, which measures the average change in prices received by producers of goods and services, serves as a potential bellwether for what consumers could experience in the months to come. Some of the PPI data also feeds in to the Personal Consumption Expenditures price index, which is what the Federal Reserve uses for its 2% target rate.

If policymakers were looking for evidence of persistent inflation, the September CPI and PPI have presented it, said Joe Brusuelas, chief economist at RSM US. He expects that PCE, due later this month, will do so as well.

More importantly for the consumer, the energy shock that caused an increase in transportation costs is starting to show up in food prices, he said, noting fresh and dry vegetable prices were up 41%, grains were up 17.4% and oilseeds were up 11.4% from August.

Gas purchases pump up retail sales

A separate report from the Commerce Department Thursday showed that Americans slowed their spending in September.

US retail sales slowed to 0.8% last month after posting a surprisingly strong 1.3% gain in August, according to the latest monthly report from the Commerce Department. However, when excluding purchases at gas stations, retail sales rose just 0.2%.

Retail sales data is adjusted for seasonality but not inflation: When factoring in the pace of monthly price hikes (which rose at an unpalatable 0.6% in September), last month’s retail sales fell even flatter.

“Higher gas prices are beginning to bite because, unlike earlier in the year, there’s no offset this time around from fiscal policy,” Michael Pearce, chief US economist at Oxford Economics, wrote in a note to investors Thursday. “We estimate the cumulative additional spend on gasoline so far this year now outweighs the rise in tax refunds from a year ago.”

On an annual basis, retail sales were up 6.3% (4.5%, excluding gas station spending). However, on a three-month annualized basis, that growth rate is running at 2.4%, signaling a loss of momentum heading into the holiday shopping season, noted Gary Schlossberg, global strategist at Wells Fargo Investment Institute.

Treasury yields were lower despite the hot inflation report as investors unnerved by a drop in AI stocks flocked into the safety of bonds.

Major stock indexes were mixed: The S&P 500 and Nasdaq fell 0.3% and 0.9%, respectively. The Dow, meanwhile, rose 0.6%.

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CNNs Matt Egan and John Towfighi contributed to this report.