Hot PPI and CPI Reports May Result in a Fed Rate Increase this Fall

By the Curmudgeon with Victor Sperandeo

PPI Report Higher Than Expected:

The April Producer Price Index (PPI) for final demand rose to 6.0% year-over-year from 4.3% in March. That was significantly higher than consensus expectations of 4.9%. The upside surprise was not confined to energy, though higher crude prices were a key driver, with price pressures broadening across both goods and services.

Core PPI for final demand, which excludes food and energy, also reaccelerated, rising to 5.2% year-over-year from 4.0% in March, well above the 4.3% expected. Both headline and core measures are now running at their fastest annual pace since 2022, underscoring that progress on inflation has stalled and upstream price pressures are re-intensifying.

Because PPI for final demand captures price changes at later stages of production and distribution, it serves as a leading indicator for consumer inflation and corporate margin dynamics. Persistent strength here raises the risk of further pass-through into rising consumer prices, complicating the Federal Reserve’s efforts to restore price stability and potentially pressuring real household purchasing power.

This PPI report keeps hot inflation squarely at the center of the Fed’s monetary policy over the coming months, likely reinforcing a “higher for longer” stance on rates as officials weigh the trade-off between their price stability and maximum employment objectives.

CPI Rises at Fastest Rate in Three Years:

The hot PPI today follows Tuesday’s report that consumer prices in the U.S. rose at the fastest rate since May 2023 last month, as sharp increases in energy costs caused by war in the Middle East made life more expensive for American consumers.

The Consumer Price Index (CPI) rose 3.8 percent in April from a year earlier, the BLS reported on Tuesday, up from a 2.4% annual increase before the Iran conflict started in February 27th and a 3.3% increase in March. The increase was driven largely by energy prices, up 3.8% just since the previous month and nearly 18% from a year earlier. The “core” CPI, stripping out volatile food and energy prices, also rose 2.8% over the year in April, up from 2.6% in March.

It’s been 62 consecutive months with U.S. inflation (CPI) above the Fed's 2% target as per this chart:

“I’m looking for anything where I can say ‘here’s some relief,’ and that’s not very easy to do in this report,” said Michael Reid, chief U.S. economist at RBC Capital Markets. “Generally, inflation is moving in the wrong direction,” he added.

Fed Funds Rate INCREASE in Fall 2026?

To the surprise of many, the CME Fed Watch Tool forecasts no rate cuts for the rest of this year. There is an 18% and 30% probability of a 25bps Fed Funds increase by the October 28, 2026, and the December 9, 2026 FOMC meetings, respectively.

Against the backdrop of ongoing geopolitical tensions involving Iran and disruptions around the Strait of Hormuz, elevated oil and key mineral prices are likely to sustain cost-push pressures, increasing the risk that inflation remains high and sticky rather than resuming a smooth glide path back to target. That may influence the Fed to RAISE the Funds rate this Fall.

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U.S. Treasury Prices Under Pressure:

The 10-year U.S. Treasury Note yield climbed to 4.49% today - a nine-month high and well above the 3.64% on September 17, 2024, when the Fed first started cutting rates. That’s not the direction U.S. Treasury Secretary Scott Bessent advocated on February 6, 2025 when told CNBC that he and President Trump are focused on the 10 year Treasury yield.

The U.S. 30-Year Yield is now 5.05%. It has only been higher for a handful of days in the last 19 years. It is now just 6 basis points from a new 19-year high.

Victor’s Monetarist View of “Inflation”:

Costs to wholesale-buyers are not inflationary, unless the Fed increases the money supply to allow the price increases to be passed on to consumers. In this economic environment, I don’t think that is possible. The M2 money supply has grown at a compounded rate of 3.78% since the low in October 2023. That’s nearly half the historical annual growth rate of 6.72% since January 1959. No serious economist would consider that as inflationary!

Only if the Fed increases the money supply by 8-10% annually would inflation occur - after a nine-month to two-year lag time.

Oil price increases, due to the current shortage caused by the closure of the Strait of Hormuz, have greatly contributed to a higher PPI. That is the excuse given by the BLS as to why they publish a “CORE CPI,” which excludes food and energy.

Only if the current elevated PPI becomes a permanent price increase, with added Fed money printing (as they did in the 1970s) will it become inflationary. So far in my view the economy will slow to a crawl, so the PPI has no long- term meaning at this time.

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The Curmudgeon
ajwdct@gmail.com

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Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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