U.S. producer prices rose higher than market estimates, fueled by a surge in energy and food products, according to new data from the Bureau of Labor Statistics (BLS).

The producer price index (PPI) for final demand rose 0.5 percent in September, higher than the consensus estimate of 0.3 percent. This was down from the 0.7 percent increase in August. The annual PPI climbed to 2.2 percent, topping economists' expectations of 1.6 percent, and the highest since April.

Goods prices swelled 0.9 percent, driven by a 5.4 percent spike in gasoline costs, accounting for more than 40 percent of the increase. Prices for jet fuel, diesel fuel, and electric power surged. Food costs rose 0.9 percent, as processed young chicken and meat soared last month. Prices for fresh and dry vegetables plummeted by nearly 14 percent.

Services prices edged up 0.3 percent, led by a 13.9 percent spike in bank deposit services. Moreover, costs surged in September for a wide range of products, such as machinery, equipment, application software publishing, accommodation services, and supplies wholesaling.

Core producer prices, excluding energy and food components, jumped 0.3 percent from August to September and advanced to 2.7 percent year-over-year. Both readings were higher than market projections of 0.2 percent and 2.3 percent, respectively.

BLS statisticians revised producer prices higher. The annual PPI was adjusted from 1.6 percent to 2 percent in August, while the core PPI was also revised higher from 2.2 percent to 2.5 percent. In addition, higher revisions were dated to May.

Overall, wholesale prices are up approximately 18 percent since January 2021.

Market analysts pay extra attention to the PPI because it is typically a precursor to the consumer price index (CPI). The former reflects changes in prices domestic producers receive for their goods and services, while the latter gauges price adjustments for products and services consumers pay.

The annual inflation rate will be released on Oct. 12. The Federal Reserve Bank of Cleveland's Inflation Nowcasting expects the CPI to be flat at 3.7 percent and rise 0.4 percent month-over-month. Core CPI is anticipated to come in at 4.2 percent year-over-year and 0.4 percent month-over-month.

The latest PPI reading "shows how difficult it is to get the horse back in the barn on inflation," Torsten Slok, the chief economist at Apollo Global Management, told Bloomberg TV.

Stubborn Inflation and the Federal Reserve

Despite more data highlighting a reacceleration of inflation, global financial markets anticipate that the Federal Reserve is finished raising interest rates.

According to the CME FedWatch Tool, the futures market is pricing in a rate pause at the November and December Federal Open Market Committee (FOMC) policy meetings.

Last month, the U.S. central bank left the benchmark fed funds rate (FFR) at a target range of 5.25 percent and 5.5 percent. But the Federal Reserve has left the door open to one more rate hike before the year is over to fight stubborn inflation.

"We have come very far, very fast in the rate increases that we've made," Fed Chair Jerome Powell told reporters at the post-FOMC press conference. "I think it was important at the beginning that we move quickly, and we did. As we get closer to the rate that we think—the stance of monetary policy that we think—is appropriate to bring inflation down to 2 percent over time, the risks become more two-sided."

Since March 2022, the FOMC has raised rates 11 times for a total of 500 basis points.

The Summary of Economic Projections (SEP) suggests that monetary policymakers expect one more rate increase this year, lifting the median FFR to 5.6 percent.

Several central bank officials have signaled that interest rates are high enough, and it might be possible that additional rate hikes are no longer needed, with Minneapolis Fed Bank President Neel Kashkari pointing to higher Treasury yields.

“It’s certainly possible that higher long-term yields may do some of the work for us in terms of bringing inflation back down,” Kashkari told a Minot State University town hall event on Oct. 10. “But if those higher long-term yields are higher because their expectations about what we’re going to do have changed, then we might actually need to follow through on their expectations in order to maintain those yields."

Mr. Kashkari described the latest acceleration in Treasury yields as "perplexing," suggesting that it could be fueled by growing economic optimism or concerns about soaring U.S. government borrowing.

Despite a retreat in the U.S. bond market this week, Treasury yields had recently touched their highest levels in 16 years. The 30-year Treasury had temporarily topped 5 percent following the hotter-than-expected September jobs report last week, the first time since August 2007.

Fed Gov. Christopher Waller also believes that tighter financial markets could do some of the central bank's work by slowing the economy to eradicate inflation pressures. However, the Atlanta Fed GDPNow Model estimate projects a 5.1 percent growth rate in the third quarter, pointing to a robust economic landscape.