September Producer Price Index Shows 0.3% Gain. What It Means.

Shoppers look at appliances for sale at a Home Depot store in California. (David Paul Morris/Bloomberg)

Wholesale inflation broadly aligned with expectations that September costs would climb slightly from the August lows, but the underlying trend in prices doesn’t provide much cause for concern.

The producer price index for total final demand rose 0.3% in September, lifting the annual rate to 2.7%, the Bureau of Labor Statistics reported on Tuesday morning. The September gauge of wholesale inflation, originally set to be released on Oct. 16, was delayed due to the 43-day government shutdown.

The consensus view among economists tracked by FactSet was that prices would rise 0.3% month over month in September after unexpectedly declining 0.1% in August relative to July. Compared with a year ago, PPI was forecast to rise 2.6%, compared to a revised 2.7% annual gain in August.

Core PPI, which excludes prices for food, energy, and trade services, rose just 0.1% on the month, for a gain of 2.9% from a year earlier, the bureau reported.

That was a bit of a mixed result compared with what economists expected to see. On a monthly basis, the core number, which has shown notable progress in moderating in recent months, was softer than expected. Economists had expected the result to match the revised monthly gain of 0.3% seen in August.

But economists only expected an annual increase of 2.7% in core PPI in September, compared with the revised rate of 2.9% for August.

Tuesday’s PPI results, while dated, were expected to provide some clarity to members of the Federal Open Market Committee and aid in their decisions around a potential interest-rate cut at their Dec. 9-10 policy meeting.

The lack of comprehensive inflation statistics due to the government shutdown has been problematic for Fed officials. They appear divided on whether to lower rates again or keep them steady.

Looking deeper at Tuesday’s data, the index for final demand goods rose 0.9% month over month in September, a significant leap from the 0.2% pace recorded in August. The bureau reported that about two-thirds of that rise, however, can be attributed to a broad rise in energy prices, which climbed 3.5% in September. That compares with a 0.4% decline month over month in August.

The index for final demand foods advanced 1.1% on the month in September after logging just a 0.1% monthly increase in August. Excluding food and energy costs, wholesale goods prices rose 0.2% month over month in September—a bit softer than the 0.3% monthly growth in August.

The index for final demand services, however, was unchanged from August to September.

The September wholesale inflation data feed into the Fed’s preferred inflation gauge, the personal consumption expenditures price index. The Bureau of Economic Analysis has announced that they will be releasing the delayed PCE inflation, spending, and expenditures numbers for September on Dec. 5, ahead of the Fed meeting.

The components of PPI that flow into core PCE, were, on balance, slightly hotter than initially anticipated for September, writes Thomas Ryan, Capital Economics’ North America economist. Ryan writes that he expects core PCE prices rose by 0.3% on a rounded basis for September, which would be an advance from the 0.2% monthly pace logged in August.

Ryan points out that both domestic and international airfares rose sharply in September, though portfolio management fees did decline on the month and could offset the uptick in airfares.

“Downward progress on inflation remains stalled, but overall this set of price data are not convincing enough to move the FOMC doves concerned about downside labour market risks closer to the inflation hawks, leaving the committee split ahead of December’s meeting,” Ryan writes.

Overall, economists expect it will be increasingly difficult to interpret both wholesale and consumer inflation data through the end of this year due to distortions related to the shutdown. The BLS announced last week that it wouldn’t be fully releasing the October consumer price index data, instead publishing the statistics it could collect with the November data on Dec. 18. The bureau hasn’t said how it will handle the missing October and November PPI data.

Odds of a cut didn’t move much following Tuesday’s release of the PPI data. The CME Fedwatch futures index placed the probability of a quarter percentage point cut at 85%. That has been largely driven by the delayed September unemployment rate published last week increasing from 4.3% to 4.4% and comments from New York Fed President John Williams and San Francisco Fed President Mary Daly, a non-voting member, appearing to support a rate cut.

In addition, Tuesday’s PPI data will help economists and Fed officials refine their estimates of third-quarter growth in gross domestic product. The Atlanta Fed’s GDPNow model estimates that inflation-adjusted GDP growth was 4.2% for the third quarter, but the New York Fed’s Nowcast estimate is just 2.3%.

-Nicole Goodkind contributed to this article.

Write to Megan Leonhardt at megan.leonhardt@barrons.com