US producer prices rise 0.4% in August as energy costs rebound

US producer prices rose in line with expectations in August as energy costs rebounded, keeping inflation pressures elevated ahead of the Federal Reserve’s policy meeting next week.

The Producer Price Index for final demand increased 0.4% last month after an upwardly revised 0.1% gain in July, the Labor Department’s Bureau of Labor Statistics said on Thursday.

Economists polled by Reuters had expected a 0.4% rise after July’s previously unchanged reading.

On a 12-month basis, producer prices climbed 5.4% in August, accelerating from a 4.8% increase in July.

Energy prices drive August increase

Energy prices rose 4.2% in August after declining for two consecutive months, providing the biggest boost to the overall producer-price reading.

Renewed hostilities between the United States and Iran pushed oil prices higher during the month.

Wholesale food prices edged up 0.1% after falling 0.9% in July.

Excluding the volatile food and energy components, the core PPI increased 0.2%, below economists’ expectations for a 0.3% rise.

Core prices excluding trade services, another volatile category, advanced 0.3%.

Producer goods prices surged 1.1% during the month and rose 0.4% excluding food and energy.

Services prices increased 0.1%, although several components recorded stronger gains.

The data comes as investors and economists assess whether inflation remains too high for the Federal Reserve to ease policy aggressively, even as the central bank weighs labor-market conditions.

PPI impact on PCE becomes harder to gauge

The PPI report is closely watched because some of its components are used in calculating the Personal Consumption Expenditures price indexes, the Federal Reserve’s preferred inflation gauge.

However, changes to the government’s methodology beginning in August are expected to complicate comparisons.

The revisions affect portfolio management and investment advice services, legal services, and computer software and accessories, changing how PPI data feeds into the PCE inflation measures.

The portfolio management component, which has contributed to significant swings in core PCE inflation, will be replaced with an imputation.

"At the same time, new PPI-based estimators for household legal services and computer software will be added," said Lou Crandall, chief economist at Wrightson ICAP in a Reuters report.

"We'll have less confidence than usual in the translation from the PPI data to the PCEPI contribution for August as a result."

Morgan Stanley economists said the methodology changes could lead to downward revisions to PCE inflation data for the first four months of the year, although they did not expect meaningful changes to the figures for May through August.

"As a result, we estimate that the 12-month and six-month annualized rates of core PCE inflation through July could be revised down to roughly 3.1% and 3.2%, respectively, from 3.3% and 3.5% currently," they wrote in a note.

"Given that we do not expect meaningful revisions to the May-July monthly prints, the three-month annualized pace through July should therefore remain broadly unchanged at around 3.0%-3.1%."

Fed faces inflation and jobs trade-off

Some Federal Reserve officials have focused on the three-month change in PCE inflation as a clearer indicator of underlying price pressures.

The Bureau of Economic Analysis will release updated PCE inflation data alongside annual revisions to gross domestic product figures on September 30.

With inflation still above the Fed’s 2% target and the labor market showing signs of regaining its footing in August, some economists have argued that the central bank should raise interest rates next week to reinforce its independence.

They also said uncertainty surrounding the Fed’s next move had contributed to higher long-term Treasury yields, adding another layer of pressure to policymakers as they balance inflation risks against economic growth and employment.