Wall Street's forecasts for the Federal Reserve's preferred inflation gauge have now shifted to anticipating a further acceleration from the level that prompted the central bank's rate hike last month. This assessment stems from the unexpectedly high Producer Price Index (PPI) released on Thursday (October 15). Data showed that the PPI rose 1.3% month-on-month, the largest monthly increase since March 2022, more than double the market consensus of 0.6%. The year-on-year increase subsequently rose to 6.3%, the largest jump since December 2022. The signal that inflationary pressures are transmitting from upstream production to consumption is becoming increasingly clear, leading Wall Street to raise its forecasts for September's core personal consumption expenditure (PCE) inflation, to be released later this month, and also bringing the possibility of another rate hike at the Fed's October meeting back into focus.

PPI significantly exceeded expectations, with inflation affecting a broader range of sectors than energy.

This week's US PPI data sent shockwaves through the market, with a 20% surge in gasoline prices being the main driver. However, excluding food, energy, and trade services, the PPI still rose healthily by 0.5%, indicating that the spread of this round of inflation extends far beyond the energy sector. The across-the-board rise in producer prices lays the groundwork for further increases in downstream consumer inflation. Seven Wall Street forecasts indicate that the US core PCE inflation for September, to be released later this month, is expected to rise by 0.32% month-on-month, higher than August's 0.25%. Wall Street economists are using the already released CPI and PPI data to extrapolate the PCE, the inflation indicator favored by the Federal Reserve.

Core PCE forecasts are diverging, putting pressure on the Federal Reserve to raise interest rates.

If core PCE rises 0.32% month-over-month, it will push the year-over-year core PCE inflation rate to 3.1% in September from 3.01% in August. The forecast range varies among institutions, with the highest being 0.35% from Barclays and the lowest being 0.29% from Oxford Economics. Kathy Bostjancic, chief economist at National Insurance Company, stated that even though recent comments from Fed officials have eased market expectations for consecutive rate hikes, there is still a real risk that the Fed will raise rates again at its policy meeting in two weeks. Alex Pelle, senior US economist at Mizuho Securities, said that the current price situation is not mild, with inflation high and still escalating. He said that based solely on economic data, the Fed has almost no reason to hesitate to continue raising policy rates. While several Fed officials have stated that there is no need to rush into raising rates, they have also hinted that further rate hikes are still needed. As a result, federal funds futures on Thursday showed a 29% probability of a rate hike at the Fed's meeting at the end of this month, but a 91% probability of at least one rate hike by December.

Inflation Target Benchmark and Policy Testing: Why is PCE Favored?

Federal Reserve Chairman Kevin Warsh once proposed a criterion for not raising interest rates: confidence that inflation could fall back to the 2% target in a timely manner. Since 2021, both overall and core PCE inflation in the US have consistently exceeded the target level. Since the tariff policy was introduced in April 2025, inflation has steadily climbed, and the rate of increase accelerated further after the outbreak of the conflict with Iran. The Fed prefers the PCE indicator because, compared to the CPI, it believes that the PCE is closer to the actual spending patterns of Americans and its weight will be dynamically adjusted as consumers change their consumption patterns.

Conclusion

In summary, the better-than-expected PPI data has brought US inflationary pressures back into the market spotlight. Stronger upstream production prices suggest further upside potential for downstream consumer inflation, and Wall Street has generally raised its September core PCE forecasts. Although recent comments from Federal Reserve officials have attempted to ease expectations of consecutive rate hikes, the reality of high inflation has tipped the policy balance back towards tightening. The Fed's policy meeting at the end of this month and the December meeting will be key moments to test the Fed's policy resolve. The market will be closely watching the upcoming PCE data and Fed Chairman Warsh's latest statements on confidence in declining inflation, seeking clues about the direction of interest rates.