Fresh data released Thursday showed producer prices accelerating for a second month, driven by a rebound in energy costs following renewed hostilities between the US and Iran. The report adds to a series of elevated readings that could bolster the case for an interest rate hike when policymakers gather next week.

The Labor Department reported that its producer price index (PPI) rose 0.4% in August from the prior month, the largest advance since May and matching economist projections. July's reading was revised up to a 0.1% gain. On an annualized basis, wholesale inflation climbed 5.4%, a notable jump from July's 4.8% pace. Excluding the volatile food and energy components, the core PPI edged up 0.2% month-over-month, coming in below the 0.3% that analysts had anticipated, with the yearly figure at 4.6%.

Energy products were the primary catalyst behind August's wholesale price acceleration, surging 4.2% for the month after two consecutive monthly declines. The uptick in oil prices, sparked by renewed US-Iran confrontations, fueled the cost rebound. Wholesale food prices inched up 0.1% after falling 0.9% in July. Overall goods prices climbed 1.1%, though excluding food and energy, goods rose a more modest 0.4%. Services prices advanced just 0.1% overall, though several subcategories showed robust gains. A separate measure, which strips out food, energy, and trade services for a less volatile read, rose 0.3%.

Data center construction has emerged as one source of pricing pressure this year, highlighted by a 3.4% surge in electronic components and accessories costs and a 0.2% uptick in computer and equipment prices. The broader construction cost index moved little. Airlines tickets increased 0.7% during the month, while healthcare categories were mixed. These specific components draw keen attention from the Federal Reserve due to their inclusion in the personal consumption expenditures (PCE) price index, the central bank's preferred inflation gauge.

Details within the PPI report regarding profit margins for wholesale and retail trade services also remain under close watch, as they could indicate whether businesses are absorbing tariff-related costs or passing them along to customers. August saw margins slip 0.2% in this category. Even though the Supreme Court invalidated many tariffs earlier this year, the administration continues to leverage other legal authorities to impose duties on imports. Trade negotiations between Washington and Ottawa broke down in August, prompting the administration to follow through on threats of 50% tariffs on billions of dollars of Canadian goods. Canada retaliated with tariffs ranging from 15% to 50% on hundreds of American products.

A notable adjustment to PCE calculation methods takes effect this month. Starting in August, the government will revise how it prices portfolio management and investment advice services, legal services, and computer software and accessories, altering the feed-through from PPI into the PCE inflation metric. Specifically, the portfolio management component, which had contributed significant volatility to core PCE readings, will be replaced with estimated figures. Lou Crandall, chief economist at Wrightson ICAP, explained that new estimated measures based on PPI for household legal services and software will be introduced simultaneously, noting that confidence in the conversion from August PPI data to the PCE price index will be lower than usual.

Economists at Morgan Stanley project that this methodological shift could lead to downward revisions in PCE inflation for the initial four months of the year, while leaving May through August figures largely intact. Their analysis suggests that the 12-month and 6-month annualized core PCE rates through July might be revised down to approximately 3.1% and 3.2%, from current readings of 3.3% and 3.5% respectively. Since meaningful revisions to the May-July monthly data are not anticipated, the three-month annualized pace through July should remain broadly within the 3.0% to 3.1% range, a timeframe that some Fed officials closely monitor. The Bureau of Economic Analysis is scheduled to release updated PCE figures alongside annual GDP revisions on September 30.

With inflation persistently above target and the labor market regaining its footing in August, certain economists contend that the Federal Reserve should deliver a hike next week to underscore its independence. They argue that prevailing uncertainty surrounding policy direction has pushed long-term Treasury yields higher. Scott Anderson, chief economist at BMO Capital Markets, noted that Fed Chair Warsh's hawkish tone at the Jackson Hole symposium has left little room for maneuver at the upcoming meeting, suggesting he would be compelled to act if he wishes to maintain anti-inflation credibility with the bond market, particularly with all data, especially inflation metrics, pointing toward a hike.

Ahead of the PPI release, financial markets had priced in roughly a 62% probability of a quarter-point rate increase at the September 15-16 meeting, according to CME's FedWatch tool. The current federal funds target range stands between 3.50% and 3.75%. Following the inflation data, stock index futures turned lower while Treasury yields advanced, with investors increasing their bets on a tightening move.

The latest consumer price index report is scheduled for release on Friday, one day after the PPI figures. Market consensus suggests that core inflation will remain relatively tame, even as rising gasoline prices potentially boost the headline number. Several Fed officials have indicated that the upcoming rate decision may hinge on what this week's reports reveal. Chair Warsh stated in a recent speech that there remains "work to do" if policymakers fail to gain confidence in substantial improvement in underlying inflation trends. Renewed oil price pressures amid ongoing US-Iran hostilities could further complicate the outlook.

Another government report Thursday showed initial jobless claims held steady at 206,000, indicating that layoffs remain subdued and continue providing support to the labor market. Since mid-July, first-time claims have hovered within a narrow band of 189,000 to 212,000, consistent with the labor market regaining its footing following a brief rough patch during late spring and much of the summer. Data released last week revealed that nonfarm payrolls expanded by 162,000 positions in August, the strongest gain in five months and a sharp improvement over July's 21,000 increase. The unemployment rate held steady at 4.1%. Despite the pick-up in job creation, long-term unemployment remains a concern, with the median duration of joblessness near four-and-a-half year highs. Continuing claims, a proxy for hiring activity, inched down by 1,000 to 1.774 million on a seasonally adjusted basis for the week ending August 29.