The slowdown in producer price growth in the United States adds to the improvement in the inflation outlook

  • Producer prices rise by 0.2% in October
  • PPI excluding food, energy, trade up 0.2%
  • PPI Increases 8.0% YoY; Core PPI up 5.4%

WASHINGTON, Nov 15 (Reuters) – U.S. producer prices rose less-than-expected in October as services fell for the first time in nearly two years, offering more evidence that inflation was starting to ease, potentially allowing the Federal Reserve to slow its aggressive pace of interest rate hikes.

The Labor Department report on Tuesday also showed a decline in the cost of wholesale goods excluding food and energy, reflecting improved supply chains and slowing demand due to rising borrowing costs. This supports economists’ views that goods disinflation was underway.

Last week’s data showed consumer prices rose less than expected in October, pushing the annual increase below 8% for the first time in eight months.

“This report will add to the narrative that inflation has peaked and, in particular, that pressures from the goods sector may be easing,” said Conrad DeQuadros, senior economic advisor at Brean Capital in New York.

The producer price index for final demand increased by 0.2% last month. September data was revised downwards to show PPI rebounding 0.2% instead of 0.4% as previously reported. In the 12 months to October, the PPI increased by 8.0%. This was the smallest year-on-year increase since July 2021 and followed an 8.4% increase in September.

Economists polled by Reuters had forecast that PPI would rise 0.4% and 8.3% year over year.

A 0.6% increase in the price of goods accounted for the increase in PPI last month. Commodity prices rose 0.3% in September. Gasoline rose 5.7%, accounting for 60% of the increase in commodity prices. Food prices increased by 0.5%, supported by fresh and dried vegetables and eggs.

Excluding food and energy, commodity prices fell 0.1%. This was the first decline in so-called basic goods prices since May 2020 and followed an unchanged reading in September. The department’s consumer inflation report last week showed that prices of basic consumer goods also fell in October.

Disinflation of basic goods has been at the heart of economists’ expectations for significant inflation moderation next year. Goldman Sachs said on Sunday that it expects underlying inflation to slow significantly as commodity prices fall.

However, the rotation of spending towards labour-intensive services and a still tight job market will likely keep inflation above the Fed’s 2% target.

The US central bank earlier this month made a fourth consecutive interest rate hike by 75 basis points but signaled it could be close to an inflection point in what has become the rate-hiking cycle fastest since the 80s.

Financial markets are betting that the Fed will pass a half-point rate hike at its Dec. 13-14 policy meeting, according to the CME FedWatch Tool.

Wall Street stocks are up. The dollar slipped against a basket of currencies. US Treasury yields have declined.

MODERATE READING

Despite a fourth consecutive month of moderate PPI readings, some economists said it was premature to conclude the Fed would shift from its aggressive tightening path, noting that inflation had previously shown signs of cooling only to warm up again. They also pointed out that services inflation remained elevated, despite the decline in wholesale services prices in October.

“The Fed cares about producer prices to the extent that they shift to consumer prices,” said Will Compernolle, a senior economist at FHN Financial in New York. “The stubborn parts of CPI inflation in basic services, such as housing, won’t be impacted any time soon by improvements in producer prices.”

Services fell 0.1%, the first decline since November 2020, after rising 0.2% in September. There have been declines in commercial services, which measure changes in profits received by wholesalers and retailers. The prices of transport and warehousing services decreased by 0.2%.

Costs of portfolio management, long-distance automobile transportation, automobile retailing, and professional and commercial equipment wholesaling have also declined.

But prices for inpatient hospital care increased by 0.8%. There have also been price hikes for brokerage and securities trading, wholesaling of clothing, and airline passenger services. Airline tickets increased by 2.1%.

Services excluding trade, transport and warehousing increased by 0.2%. Core services increased 0.5% in September.

Excluding the volatile food, energy and trade services components, producer prices increased by 0.2% in October. Core PPI advanced 0.3% in September. In the 12 months to October, core PPI rose 5.4% after a 5.6% increase in September.

With the CPI and PPI data in hand, economists estimate that the basic price index of personal consumption expenditure (PCE) rose between 0.2% and 0.3% in October after rising by 0, 5% in September. The core PCE price index is expected to rise 5.0% year-on-year following a 5.1% increase in September. The Fed tracks PCE price indices for its inflation target.

Some are concerned about the increase in most components of medical services in October, which they say was driven by wages.

“This could be an even more troubling inflation dynamic for Fed officials who have been reluctant to acknowledge wages as a driver of steep price inflation,” said Veronica Clark, an economist at Citigroup in New York.

Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci

Our standards: the Thomson Reuters Trust Principles.

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