Dive Brief:

• The Producer Price Index (PPI) for final demand, a measure of what suppliers charge businesses, fell 0.1% in August compared with July as the price of fuel and other goods declined, the Labor Department said Wednesday.
• At the same time, “core” PPI — or the index excluding volatile food and energy prices — rose 0.4% last month and 7.3% compared with August 2021 largely because of increasing costs for services such as warehousing and transportation, according to Labor Department data.
• Decreasing gasoline prices helped push down the price of goods by 1.2% last month, and food prices did not change compared with July, the Labor Department said. On an annual basis PPI increased 8.7% in August compared with 9.8% in July.

Dive Insight:

The rise in core PPI, and a similar increase in the Consumer Price Index (CPI) excluding energy and food prices, suggest that inflation is taking root in parts of the economy less vulnerable to price changes.

Core CPI rose in August 6.3% on an annual basis compared with 5.9% in both June and July. The increase in core prices spanned several categories, including shelter, medical care, education and automobiles, the Labor Department said Tuesday.

Shelter prices, which constitute one third of CPI, jumped 6.2% compared with August 2021. Among non-core categories, food costs soared 11.4% in the highest 12-month gain since May 1979, prompting an 8.3% increase in CPI including the prices for energy and food.

Persistently high core inflation will probably require Federal Reserve policymakers to push up the main interest rate beyond 4% in order to reduce inflation to their 2% target, former Treasury Secretary Lawrence Summers said.

The central bank lifted the federal funds rate in July to a range between 2.25% and 2.5% and in June forecast an increase to around 3.4% by the end of this year and 3.8% by the end of next year.

“With core inflation running above 7% this month and likely, given rent behavior, to remain elevated, I fear it is unlikely that a peak fed funds rate around 4% will be enough to restore 2% inflation,” Summers said on Twitter.

The report of unexpectedly high inflation prompted analysts and traders to predict that the Fed, for the third consecutive meeting, will increase the main interest rate by 75 basis points at the end of a two-day gathering on Sept. 21. A basis point is one hundredth of a percentage point.

“It has seemed self-evident to me for some time now that a 75 basis points move in September is appropriate,” Summers said. “If I had to choose between 100 basis points in September and 50 basis points, I would choose a 100 basis points move to reinforce [Fed] credibility.”

Disruption to supply chains — a leading cause of high price pressures — may worsen if labor contract negotiations break down and roughly 125,000 railway workers make good on plans to strike on Friday. White House officials are trying to broker a deal.

Despite months of inflation running at or near a four-decade high, consumers last month said they expect price pressures to ease in the coming years, according to a survey by the Federal Reserve Bank of New York.

Households expect 5.7% inflation one year from now, a decrease from a 6.2% prediction in July, the New York Fed said. In three years, inflation will fall to 2.8%, according to survey respondents. In July, the respondents said they expected 3.2% inflation in three years.