Wholesale Inflation is a Problem

by Martin Armstrong

The latest inflation figures should put an end to the ridiculous claims that inflation has been defeated. The Producer Price Index surged 1.3% in September alone, the largest monthly increase since March 2022, while wholesale prices are now rising at an annual rate of 6.3%. Economists had expected an increase of approximately 0.6%, yet the actual number was more than DOUBLE their forecast. The Consumer Price Index released the previous day showed inflation accelerating to 3.7%, and now we see the pressure building at the producer level as well. Washington keeps assuring the public that inflation is under control while the cost of producing and distributing virtually everything continues climbing.

The Bureau of Labor Statistics reported that wholesale energy prices jumped 10.8% in September, with gasoline prices at the producer level surging 20.3%. Food prices increased another 1.2%, while the index for final demand goods rose 2.6%, the largest monthly increase since that series began in 2009. Even excluding food and energy, producer prices increased 0.7%, demonstrating that the problem extends beyond the oil market. Businesses are being hit with rising costs at virtually every stage of production, and those increases do not simply disappear because some economist sitting in Washington believes inflation should return to 2%.

The retail sales report released alongside the inflation data is equally revealing. Retail sales rose 0.8% in September, beating expectations of approximately 0.3%, and the financial press immediately began celebrating the supposed resilience of the American consumer. Yet gasoline station sales surged 7.1%, and retail sales excluding gasoline increased only 0.2%. The control group used in calculating GDP, which excludes automobiles, gasoline, building materials, and food services, managed an increase of just 0.1%. Consumers are spending more money, but a considerable portion of that increase reflects the higher price of necessities rather than any meaningful improvement in their standard of living.

This is the great deception in the way economic statistics are presented to the public. Retail sales are measured in dollars and are not adjusted for inflation. If gasoline costs another 20% and the public continues purchasing roughly the same amount because they must drive to work, the government records higher sales. That does not mean consumers have suddenly become wealthier or more confident. It means they are surrendering more of their disposable income to purchase what they were already buying. The same applies to groceries, utilities, insurance, and countless other expenses that cannot simply be eliminated from a household budget.

Americans have already endured an enormous increase in the cost of living since 2020. The pandemic-era monetary expansion helped create a massive inflationary surge, and those price increases were never reversed. When inflation temporarily declined from 9% to 3%, politicians celebrated as though they had somehow restored purchasing power. They had done NOTHING of the sort. Prices remained elevated, and every additional monthly increase compounds the damage. A family that could once afford a mortgage, two vehicles, groceries, and occasional savings is now being forced to make choices between expenses that were previously manageable on the same income.

The energy situation is particularly troubling because the conflict involving Iran has disrupted petroleum markets and pushed fuel costs higher. Diesel is essential to agriculture, trucking, construction, and manufacturing. A farmer cannot refuse to operate his equipment because fuel has become expensive, and a trucking company cannot deliver goods without diesel. Those businesses must either absorb the additional costs, reduce operations, or pass the increases along to their customers. Higher energy prices eventually work their way through the entire economy, and today’s producer inflation becomes tomorrow’s pressure on consumer prices. That pass-through is neither automatic nor uniform, but the squeeze on business margins is already apparent.

Now the Federal Reserve is confronted with another problem of its own making. Inflation is accelerating, wholesale prices are rising faster than consumer prices, and government borrowing continues expanding. Kevin Warsh can raise interest rates in an attempt to restrain demand, but higher rates will not produce additional oil or reduce the cost of shipping goods through a disrupted international energy market. They will, however, increase financing costs for businesses, homebuyers, and consumers already struggling to manage their expenses. The Fed is being asked to correct problems that monetary policy alone cannot resolve.

Washington has accumulated more than $40 trillion in federal debt and continues spending without any serious plan to restore fiscal discipline. Treasury Secretary Scott Bessent must find buyers for that debt while the government competes with the private sector for available capital. Higher inflation also encourages bond investors to demand greater yields because nobody wants to lend money for ten or thirty years only to discover that inflation has destroyed the real value of their investment. The government wants lower interest rates to reduce its borrowing costs, but the bond market must consider inflation, sovereign risk, and international capital flows. Politicians cannot simply command investors to ignore those realities.

The September figures show wholesale inflation accelerating to 6.3% while the apparent strength in retail sales is being heavily influenced by expensive gasoline. This is hardly evidence of a healthy consumer economy. Inflation is again gathering momentum, and the government has fewer options than it wants to admit because its own debt and spending have become part of the problem.