Prices Just Jumped Again. That Could Mean Trouble for the Stock Market Next Week

The producer price index (PPI), which measures wholesale prices in the U.S., rose 0.4% in August and 5.4% from a year ago. The monthly figure was in line with expectations, but the yearly figure came in 0.1% above what economists expected. Here's a look at some of the details:

The energy and fuel price jumps are especially concerning. Rising costs here often flow downstream to the rest of the economy.

Still, this report doesn't guarantee that consumer inflation is about to take off, but it does little to reassure economists that inflation will cool off naturally, raising the probability that the Federal Reserve will raise interest rates. That could have real consequences for the stock market.

The S&P 500 (SNPINDEX:^GSPC) was down nearly 0.6% today.

The Iran war is making the inflation problem harder

The inflation reading hit on the same day that oil prices hit levels not seen since May of 2026. Brent crude, an international benchmark, spiked nearly 7.5% today and topped $108.

The oil rally followed renewed conflict in the Iran war. After the U.S. hit five Iranian oil tankers on Tuesday, Iranian forces struck 10 ships in the Strait of Hormuz. At the same Iranian-backed Houthi Rebels seized the Yemeni port of Mocha, threatening Red Sea oil flows.

If the conflict continues and oil stays above $100, higher fuel costs could force businesses to raise prices or be forced to accept smaller margins.

A September rate hike is now the market's base case

After the PPI report was released, the market's expectation of a rate hike from the Federal Reserve's meeting next week jumped from 61% to 70%, according to data from FedWatch. Odds of an additional hike at the following meeting jumped as well.

This doesn't make a hike certain, but unless the consumer price data released on Sept. 11 changes the picture, it's looking more likely than not.

The bond market is flashing a warning

At the same time that a rate hike is looking more likely, Treasury yields are rising amid a global bond sell-off. Prices and yields move in opposite directions.

The two-year U.S. Treasury yield reached 4.58%, while the 10-year yield climbed to 4.96%, and the U.S. 30-year hit 5.37%.

Expensive AI stocks could feel this twice

OK, so why does this all matter for the stock market?

First, let me make clear that, despite what some believe, the Fed does not directly control yields in the bond market. It sets what's known as the federal funds rate, and this influences bond yields, especially shorter-term bonds, like the two-year.

However, longer-term bond yields are much more sensitive to macro forces and are less directly impacted by the Fed rate. In fact, the two can even move in opposite directions under certain circumstances. If, for instance, the market believes that the Fed is not doing enough to tackle inflation, a rate cut from the Fed could lead to a rise in long-term yields.

Regardless, if bond yields continue moving higher, it's likely to impact the stock market. Investors who can get a solid return from an extremely safe asset like a U.S. Treasury are less likely to take on the risk inherent in stocks. That means money moves out of stock and into bonds.

More than that, rising yields mean it's more expensive for businesses to borrow money. That is extremely important at a time when AI companies are increasingly relying on borrowing to fund the data center build-out.

Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.