Another Sign Of Coming Inflation To Worry The Federal Reserve

The 3.1% year over year growth in average hourly wages reported for October is, by itself, enough to convince the Federal Reserve that an increase in inflation, long awaited with concern, is visible on the horizon.

Today’s jump in the Producer Price Index (PPI) for October just adds to the worrying inflation picture, as the Fed sees it. The PPI climbed 0.6% in October from September’s levels and is now up at a year over year rate of 2.9%. The core PPI, which excludes food and energy prices, rose 0.5% from September and now shows a 2.6% year over year rate of growth.

The PPI is important for anyone trying to forecast future inflation since prices at the producer or wholesale level wind up getting passed through to consumers. One of the themes in third quarter guidance from companies reporting earnings was that input costs were rising and that companies would be raising prices.

The most worrying element in today’s report–for the inflation watchers at the Fed–is that the subindex for services was up 0.7% from September and accounted for 60% of the increase in the index. Services make up about 65% of headline PPI, so the fact that the index for services increased faster than the index for goods (up 0.6% from September to October) points to future upward pressures on the PPI and finally on measures of inflation at the consumer level.

The CME FedWatch tool, which calculates the odds of a move by the Federal Reserve by looking at prices in the Fed Funds Futures market, puts the odds of a 25 basis point interest rate increase from the Fed at its December 19 meeting at 75.8%. The odds of an additional 25 basis point rate increase at the Fed’s March 20, 2019 meeting stand at 53.6% as of today November 9.