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.
The Fed can control inflation through demand destruction. Tank the economy and throw enough people out of work so people buy less and inflation goes down.
It's like chemotherapy: it works, but it destroys so much of the rest of your body in the meantime that sometimes you wonder if the pain is worth the gain.
Trump & Congress have access to much less painful means to lower inflation, but they've refused to act.
Can happen doesn’t mean likely to happen. Certainly disinflation in 2022-2023 raised unemployment, and it’s by far the most likely outcome of raising rates high enough to curb inflation.
What do you think "demand cooled" means if not increased unemployment. Its a neat way of transferring the pain to the politically weak, whilst calling it "demand cooling", or whatever the euphemism du jour is for making people unemployed. It's all about targeting the mythical NAIRU rate.
Reducing the deficit. Credit changes how private money is made through the monetary system. Fiscal policy directly creates and destroys dollars in the economy–it's fare more powerful.
Reducing the deficit by any substantial amount means cutting entitlements or raising taxes substantially. That's political suicide (not that political suicide wasn't already committed by this administration).
Energy prices for Joe Average can be stabilized by having non-essential users (AI data centers) subsidize everyone else through taxes or differentiated rates.
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. The case where that doesn't happen is when rates are being held low.
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.
> Practically speaking, higher rates today would mean less borrowing to build datacenters.
This is only true if the cost of capital is a functional constraint. If the constraint is elsewhere (in this case: sourcing GPUs, bringing online energy resources) it will not have any significant effect.
When the expected return is very high because the captured resource is perceived to be monopolistic, this lever does practically nothing. Unless they raise it so much they destroy everything else.
> This is only true if the cost of capital is a functional constraint
Then there are not, by definition, "more projects chasing a shrinking supply of capital."
> in this case: sourcing GPUs, bringing online energy resources
This is supply-side inflation. You can still bring down inflation with rates by cooling demand. (Less free cash in the economy means less spending on AI means less demand for GPUs.) The downside is it costs you more output than in a balanced economy.
> 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?
It reduces the attractiveness of a lot of investments, some that require oil, some that don't, and many that require labor, and that last thing means less jobs.
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 (top 10%) drive almost half of US consumption, so yeah, the wealthy are consuming as long as they are and continue to feel wealthy from the stock market. Energy inflation is immaterial to them, it is a rounding error.
"...average MPCs decline gradually with both income and wealth—from around 25 percent to 20 percent—before dropping off in the upper segments. Average MPCs among households in the top percent of the income and wealth distributions are about 14 percent and 15 percent, respectively" (FEDS Note).
I didn't know this. I wonder if the concavity is symmetric between an increase and decrease in wealth...
There are two big levers the government has to control inflation: monetary policy and fiscal policy.
Monetary policy is where the central bank changes rates. This is effective to a point. It defuses a lot of zero-interest nonsense but the primary idea was to cool the business sector by making borrowing more expensive. Thing is, we don't really do that anymore. We don't borrow a bunch of money to build a factory to make widgets. No, we simply financialize everything. Yes, we have a ton of AI debt now but (IMHO) it's not productive output. The big product and promise of AI is labor displacement. That's going to destroy the economy.
Private equity technically borrows money but usually only temporarily. The target gets bought, restructured, a loan is taken out against the assets to pay back to investors and the corpse is spun out before the debt explodes. The problem? The market seems to be wising up to this bargain and these husks need to be kept on the books longer than desired. PE firms are having to borrow to refinance. That's another house of cards in all of this.
But what really fuels PE and all of this? Real estate. Hoarding land has become the best performing asset.
So the second lever the government has is fiscal policy, specifically taxation. Prior to the pandemic, a lot of companies were afraid to raising prices too much as they'd lose market share. An energy crisis triggered a fundamental change in corporate attitudes to raising prices and we've had a ton of raising prices simply to maintain profits or in anticipation of inflation. Pepsi now is in deep trouble because they've discovered that people don't want to pay $8 for corn chips and Walmart's generic brand is $5 and probably made by the same factory.
In the wake of the pandemic some countries introduced a windfall profits tax. Basically, predatory price-raising should be punished with at least a form of wealth redistribution. These measures were few and far between however.
As an example, because of 2020 energy crisis (caused by Trump) and Russia's invasion of Ukraine, Europe has been in a deep energy crisis for years with no end in sight. Many European governments have tried to protect consumers by subsidizing electricity. Well, these energy providers are making record profits. Why aren't they taxing the back end to pay for those subsidies? Instead, we just have a massive wealth transfer from European governments to (often private) utilities and gas producers.
But fiscal policy, particularly in the US, never gets discussed int his way. We could solve so many problems by simply having a 50% corporate tax rate. The standard objection is "they'll move overseas". Well, you can't move land overseas, particularly mines and oil wells. And the IRS is capable of tackling transfer pricing and profit shifting. Well, they would be if they weren't deliberately starved by successive governments. And if all else fails, punish companies for moving overseas with tariffs. That's what they're actually for.
So, back to your question, no, I don't think the theory is sound because we have a malignant tumor at the heart of our economy, which is land-hoarding.
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/
It's like chemotherapy: it works, but it destroys so much of the rest of your body in the meantime that sometimes you wonder if the pain is worth the gain.
Trump & Congress have access to much less painful means to lower inflation, but they've refused to act.
Rates can be raised, and demand cooled, without raising unemployment.
Changing stupid energy policy that is propping up oil demand.
When China is selling batteries and solar below cost or at tiny profit, the federal government is effectively giving the subsidy to other countries.
When wind is the cheapest with the highest ROI we should be doing more of it.
Reducing the deficit. Credit changes how private money is made through the monetary system. Fiscal policy directly creates and destroys dollars in the economy–it's fare more powerful.
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. The case where that doesn't happen is when rates are being held low.
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
This is only true if the cost of capital is a functional constraint. If the constraint is elsewhere (in this case: sourcing GPUs, bringing online energy resources) it will not have any significant effect.
When the expected return is very high because the captured resource is perceived to be monopolistic, this lever does practically nothing. Unless they raise it so much they destroy everything else.
Then there are not, by definition, "more projects chasing a shrinking supply of capital."
> in this case: sourcing GPUs, bringing online energy resources
This is supply-side inflation. You can still bring down inflation with rates by cooling demand. (Less free cash in the economy means less spending on AI means less demand for GPUs.) The downside is it costs you more output than in a balanced economy.
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.
So maybe elastic or inelastic isn't a binary, but somewhat closer to a step function
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...
I didn't know this. I wonder if the concavity is symmetric between an increase and decrease in wealth...
Monetary policy is where the central bank changes rates. This is effective to a point. It defuses a lot of zero-interest nonsense but the primary idea was to cool the business sector by making borrowing more expensive. Thing is, we don't really do that anymore. We don't borrow a bunch of money to build a factory to make widgets. No, we simply financialize everything. Yes, we have a ton of AI debt now but (IMHO) it's not productive output. The big product and promise of AI is labor displacement. That's going to destroy the economy.
Private equity technically borrows money but usually only temporarily. The target gets bought, restructured, a loan is taken out against the assets to pay back to investors and the corpse is spun out before the debt explodes. The problem? The market seems to be wising up to this bargain and these husks need to be kept on the books longer than desired. PE firms are having to borrow to refinance. That's another house of cards in all of this.
But what really fuels PE and all of this? Real estate. Hoarding land has become the best performing asset.
So the second lever the government has is fiscal policy, specifically taxation. Prior to the pandemic, a lot of companies were afraid to raising prices too much as they'd lose market share. An energy crisis triggered a fundamental change in corporate attitudes to raising prices and we've had a ton of raising prices simply to maintain profits or in anticipation of inflation. Pepsi now is in deep trouble because they've discovered that people don't want to pay $8 for corn chips and Walmart's generic brand is $5 and probably made by the same factory.
In the wake of the pandemic some countries introduced a windfall profits tax. Basically, predatory price-raising should be punished with at least a form of wealth redistribution. These measures were few and far between however.
As an example, because of 2020 energy crisis (caused by Trump) and Russia's invasion of Ukraine, Europe has been in a deep energy crisis for years with no end in sight. Many European governments have tried to protect consumers by subsidizing electricity. Well, these energy providers are making record profits. Why aren't they taxing the back end to pay for those subsidies? Instead, we just have a massive wealth transfer from European governments to (often private) utilities and gas producers.
But fiscal policy, particularly in the US, never gets discussed int his way. We could solve so many problems by simply having a 50% corporate tax rate. The standard objection is "they'll move overseas". Well, you can't move land overseas, particularly mines and oil wells. And the IRS is capable of tackling transfer pricing and profit shifting. Well, they would be if they weren't deliberately starved by successive governments. And if all else fails, punish companies for moving overseas with tariffs. That's what they're actually for.
So, back to your question, no, I don't think the theory is sound because we have a malignant tumor at the heart of our economy, which is land-hoarding.
https://www.cnbc.com/2026/11/12/in-policy-switch-fed-says-it...