KEY DATA: PPI: +0.2%; Less Food and Energy: +0.2%; Energy: +13.4%

IN A NUTSHELL: “The winds of change hit the energy sector in August, driving up prices sharply.”

WHAT IT MEANS: The Fed meets next week and good luck to the members as they try to figure out where we go from here. The best they can do is determine where things were BH (before hurricanes) and as we have seen, economic growth was running pretty much at a normal pace. As for their inflation concerns, wholesale costs rose in August, but most of that had to do with energy dislocations that drove up the prices of most products. Excluding energy, producer prices increased modestly. Food costs were down fairly sharply with a variety of products posting declines. The other sectors where prices jumped were transportation, warehousing and construction. Services costs, which had been leading the way toward higher inflation, rose again but not by much. Over the year, finished goods costs have surged 2.9%.   Though there is a wide variation across the categories, the increases were widespread enough to point to some increased producer costs. Looking into the future, the major source of pressure is the energy sector. Once the problems created by the hurricanes dissipate, those will likely fade as well.

MARKETS AND FED POLICY IMPLICATIONS: Another day, another number that tells us where we were but not where we are going. Inflation is picking up and had this been the case without the weather, everyone would be saying that the Fed was going to hike rates soon. While energy prices are already starting to come down, other costs will likely rise and some of them sharply. Somewhere between one-half and a million vehicles may have to be replaced and that will put pressure on new and especially used vehicle prices. Home reconstruction in both Texas and Florida will put major price pressures on building supplies while labor is likely to be in short supply. Good luck trying to repair a roof. In other words, over the next six months we should see a whole slew of prices rise, at both the consumer and producer level. That will likely give the Fed some cover to raise rates and reduce its balance sheet. So we are only dickering over timing. I still believe there will be one more rate hike and the start of balance sheet normalization by year’s end. The members will likely look past any short-term negative numbers and that includes the surge in energy costs. They know the economy is moving forward and that ultimately, there will have to be an awful lot of private and public spending on goods and services that would not have happened without the massive losses created by Harvey and Irma. Let’s hope this is it for the hurricane season.