Economists: Hot PPI shows Fed's work is not done

Wall Street estimates for the Federal Reserve's preferred inflation indicator now expect an acceleration from the level that prompted the central bank to hike rates last month.

The estimates come after a hotter-than-expected producer price index came in at 1.3% Thursday, the biggest monthly gain since March 2022 and more than double the 0.6% consensus.

That drove the year-over-year increase to 6.3%, the biggest jump since December 2022. The increase was paced by a 20% rise in gasoline prices. But taking out food, energy and trade services, prices still rose a healthy 0.5%, indicating that inflation was broader than just energy.

Seven Wall Street estimates gathered by CNBC show core personal consumption expenditures inflation for September, which will be published later this month, is forecast to rise 0.32%, up from 0.25% in August. Wall Street economists use the consumer price index, released Wednesday, and the PPI to estimate the PCE.

"We see real risks the Fed will deliver another rate hike in two weeks' time even as recent Fedspeak tempered expectations for back-to-back increases,'' wrote Kathy Bostjancic, chief economist at Nationwide.

Several Fed officials have argued that the Fed does not need to hurry to hike rates, though they have suggested more rate hikes are needed. As a result, Fed futures on Thursday showed just a 29% probability of a hike at the Fed meeting at the end of this month, but a 91% probability of at least one hike by December.

A 0.32% increase in PCE would boost the year-over-year core inflation rate to 3.1%, up from 3.01% in August. Estimates ranged from a high of 0.35% from Barclays to a low of 0.29% from Oxford Economics.

"The picture is not benign with inflation elevated and intensifying," wrote Alex Pelle, senior U.S. economist at Mizuho Securities. "On the economic data alone, there is little reason for the Fed to hesitate to continue moving the policy rate higher."

Fed Chairman Kevin Warsh has suggested one litmus test for not hiking is confidence that inflation will return in a timely manner to the Fed's 2% target. Both headline and core PCE inflation have been above target since 2021. They have inched steadily higher since tariffs were introduced in April 2025. The gains have accelerated since the beginning of the Iran war.

The Fed prefers the PCE because, compared to the CPI, it believes it more closely resembles how Americans actually spend their money and changes its weightings when consumers change their spending patterns.