U.S. October PPI Rises 6.5% YoY, Highest in Nearly Four Years
U.S. producer prices rose 6.5% YoY in October, the highest since November 2022, below expectations of 6.6% and up from 6.3% previously. PPI increased 0.3% MoM, below the expected 0.4%, while September’s reading was revised up from 1.3% to 1.4%.
Is the theory still sound for raising rates to control inflation under these circumstances? Not completely unsound, but I think less effective when inflation is driven by energy prices, than when the inflation is driven more by financialization.
It's a great question. The Fed cannot print more oil, and so any efforts to reduce energy inflation with interest rates is going to be futile. Fiscal policy must step in (Congress) to both stabilize the oil market and accelerate our transition off of oil (which would prevent energy inflation in the future, EVs, batteries, enough sunlight hits the Earth every 30 minutes to power humanity for a year, etc, etc).
Fundamentally, due to structural demographics, we have arrived at a capital shortage period after a long capital surplus period [1]; there will be, for long into the future, more projects chasing a shrinking supply of capital. This will continue to push interest rates up, which will also drive asset prices down (real estate, private equity, etc) [2].
Tangentially, about a year ago, I predicted that the Fed could beat on the economy all it wants with higher rates and this would not cause mass unemployment, because the world is rapidly aging and how fast workers are retiring out of the labor force [3]. This thesis appears to have been proven accurate, but more time is required to make the thesis more durable.
> any efforts to reduce energy inflation with interest rates is going to be futile
Raising rates makes credit more expensive. That cools down growth. That, in turn, eases resource demand (as a function of the resource intensity of GDP).
Practically speaking, higher rates today would mean less borrowing to build datacenters. (And new homes, et cetera.) Which would mean those marginal resources going to other uses. Which would ease price pressure.
> there will be, for long into the future, more projects chasing a shrinking supply of capital
Capital is priced in rates. Too many projects chasing too little capital will drive rates up until the capital markets balance.
And current spreads indicate a surplus of capital [1]. That's why we're seeing e.g. multi-trillion dollar IPOs.
> the Fed could beat on the economy all it wants with higher rates and this would not cause mass unemployment, because the world is rapidly aging and how fast workers are retiring out of the labor force
I like this thesis–it means the Fed has a lot more room to raise rates than is conventionally appreciated. I'm also cautious about embracing it. Reminds me too much of the MMT-means-inflation-isn't-real nutters from the early 2020s.
> The Fed cannot print more oil, and so any efforts to reduce energy inflation with interest rates is going to be futile
Doesn't increasing interest rates reduce demand though? So they can't print more oil, but they can reduce the attractiveness of investments that will require oil, thus indirectly driving prices down?
Elastic demand, but not inelastic demand. And there is a material amount of inelastic demand across the economy which is keeping demand durable, regardless of interest rates and oil/diesel prices.
In the US, the economy is passing increased money and energy costs to consumers. In China and other countries, they are rapidly electrifying light and heavy vehicles. Different responses to similar economic signals.
Could be more specific, but I agree with the sentiment. Highest US earners drive almost half of US consumption, so yeah, the wealthy are consuming as long as they are and continue to feel wealthy. Energy inflation is immaterial to them.
It's not sound no, and never really was given how doggedly the policy has been stuck to. The policy amounts to handing out wadges of cash to people with money, then ignoring that bit and hoping the hardship suffered by those that need to borrow will offset the activity of the people with interest income. At best, it's weak sauce compared to actual fiscal policy.
Impacts short term rates, bond market controls longer term rates (10Y-30Y). Bond market prices in inflation forecasts regardless of what the Fed does from a pricing and yield optimization perspective, so inflation data reporting goes directly into bond market movements.
https://blog.sentinel-team.org/p/special-report-rising-bond-...
https://www.cmegroup.com/markets/interest-rates/cme-fedwatch...
https://www.ustreasuryyieldcurve.com/
Fundamentally, due to structural demographics, we have arrived at a capital shortage period after a long capital surplus period [1]; there will be, for long into the future, more projects chasing a shrinking supply of capital. This will continue to push interest rates up, which will also drive asset prices down (real estate, private equity, etc) [2].
Tangentially, about a year ago, I predicted that the Fed could beat on the economy all it wants with higher rates and this would not cause mass unemployment, because the world is rapidly aging and how fast workers are retiring out of the labor force [3]. This thesis appears to have been proven accurate, but more time is required to make the thesis more durable.
[1] https://www.apollo.com/wealth/insights-news/insights/daily-s...
[2] https://news.ycombinator.com/item?id=50329344
[3] https://news.ycombinator.com/item?id=44392820
Raising rates makes credit more expensive. That cools down growth. That, in turn, eases resource demand (as a function of the resource intensity of GDP).
Practically speaking, higher rates today would mean less borrowing to build datacenters. (And new homes, et cetera.) Which would mean those marginal resources going to other uses. Which would ease price pressure.
> there will be, for long into the future, more projects chasing a shrinking supply of capital
Capital is priced in rates. Too many projects chasing too little capital will drive rates up until the capital markets balance.
And current spreads indicate a surplus of capital [1]. That's why we're seeing e.g. multi-trillion dollar IPOs.
> the Fed could beat on the economy all it wants with higher rates and this would not cause mass unemployment, because the world is rapidly aging and how fast workers are retiring out of the labor force
I like this thesis–it means the Fed has a lot more room to raise rates than is conventionally appreciated. I'm also cautious about embracing it. Reminds me too much of the MMT-means-inflation-isn't-real nutters from the early 2020s.
[1] https://www.macrotrends.net/3229/us-high-yield-bond-spread
Doesn't increasing interest rates reduce demand though? So they can't print more oil, but they can reduce the attractiveness of investments that will require oil, thus indirectly driving prices down?
In the US, the economy is passing increased money and energy costs to consumers. In China and other countries, they are rapidly electrifying light and heavy vehicles. Different responses to similar economic signals.
Citations:
https://www.rbc.com/en/economics/us-analysis/us-featured-ana...
https://www.cnbc.com/make-it/2026/03/06/e-shaped-economy-rep...
https://www.axios.com/2026/01/22/jobs-stock-market-rich-amer...
https://finance.yahoo.com/news/top-10-earners-drive-nearly-1...
https://www.federalreserve.gov/econres/notes/feds-notes/weal...
Wealth effect is real, to my knowledge, at all wealth levels.
https://www.cnbc.com/2026/11/12/in-policy-switch-fed-says-it...
how did it