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Inflation Lies in Food, Energy

Inflation is fueled by food and energy price hikes, according to a report released by the U.S. Department of Labor on Thursday morning.

The Producer Price Index (PPI) for final demand rose by 0.5% in September. PPI gained 0.7% in August, and 1.0% in July. On an unadjusted basis, September PPI rose at an annual rate of 8.6%. That’s the most significant advance since 12-month data were first calculated in November 2010.

As expected, the big annual jump in the September PPI is caused by hikes in food and energy prices. Nearly 80% of the September increase in the PPI is attributed to a 1.3% hike in prices for final demand goods. The PPI for final demand services moved up 0.2%.

When food and energy are taken out from the calculations, PPI rose by a meager 0.1%. (See Insiders’ Hot Stocks on TipRanks)

The PPI report was the third inflation report released this week by government agencies, providing Wall Street the opportunity to assess the state of the U.S. inflation.

On Tuesday, the U.S. government released the U.S. Inflation Consumer Expectations (ICE), followed by the Consumer Price Index on Wednesday. They both showed that inflation stayed elevated, above 5%, but very close to market expectations.

Still, debt and equity traders and investors focused their attention on the PPI, as this number confirms that inflation could ease once food and energy prices hike level off.

How long will that take? As long as the world economy is striving to adjust to supply chain bottlenecks and labor shortages that prevent the supply of food and energy from catching up to demand.

It could be a few weeks or a few months, but that didn’t seem to matter for traders and investors on Wall Street, who pushed bond yields down and equity prices down in a “relief rally.”

Adding to the trader and investor enthusiasm for equities was strong earnings from big banks, which are in services, and therefore, do not have to worry about supply chain bottlenecks.

Meanwhile, banks have been riding several tailwinds, like a rising interest rate spread, lower loan write-offs, and a return in demand for new loans.

While it is still unclear whether this rally will continue for several trading days, one thing is clear: October saves many surprises for true believers.

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