The US released some critical economic reports yesterday. The retail sales and producer price reports for September showed strong spending, but also rising costs that could keep inflation and interest rates elevated. Market attention immediately turned to the US Federal Reserve Board (Fed) and how these results might impact its upcoming interest rate decision.

Retail sales growth beat expectations, rising by 0.8% in September, following an upwardly revised 1.3% gain in August. This marked the second consecutive month of rising sales.
Sales at gasoline stations  jumped by 6.4%, driven by higher prices at the pump. Excluding automotive and gasoline sales, retail sales rose by just 0.2%. Sales excluding food services, automotive, building materials and gasoline stations, which is used in the calculation of gross domestic product, edged higher by 0.1%.
The producer price index,  which tracks wholesale prices, rose by 1.3% in September, its biggest monthly gain since March 2022, and second largest ever. Energy prices surged by 10.8%, with gasoline up 20.3% over the month.
On a year-over-year basis, producer prices rose by 6.3% in September, which was its largest increase since December 2022.
Higher costs for businesses  could be passed on to consumers. Consumer spending was unstable in September despite the higher reading as much of the gains came in part due to higher gasoline prices. The Fed will need to closely analyze the underlying data before its next interest rate decision on October 28.

US consumers are still spending, but much of September's strength reflects higher gasoline prices rather than broader demand. And with producer costs surging, inflationary pressures may persist, which could keep the Fed on a path of higher interest rates. This will tighten financial conditions and could put pressure on US households.

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