Slower U.S. Producer Price Growth Adds To Improving Inflation Outlook

U.S. producer prices increased less than expected in October as services fell for the first time in nearly two years, offering more evidence that inflation was starting to subside, potentially allowing the Federal Reserve to slow its aggressive pace of interest rate hikes.

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

Data last week 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 rose 0.2% last month. Data for September was revised lower to show the PPI rebounding 0.2% instead of 0.4% as previously reported. In the 12 months through October, the PPI increased 8.0%. That was the smallest year-on-year increase since July 2021 and followed an 8.4% advance in September.

Economists polled by Reuters had forecast the PPI rising 0.4% and advancing 8.3% year-on-year.

A 0.6% increase in the price of goods accounted for the increase in the PPI last month. Goods prices rose 0.3% in September. Gasoline jumped 5.7%, making up 60% of the rise in goods prices. Food prices rose 0.5%, lifted by fresh and dry vegetables as well as eggs.

Excluding food and energy, goods prices dipped 0.1%. That was the first decrease in the so-called core goods prices since May 2020 and followed an unchanged reading in September. The department's consumer inflation report last week showed consumer core goods prices also declined in October.

Core goods disinflation has been at the center of economists expectations for a significant moderation in inflation next year. Goldman Sachs on Sunday said it expected underlying inflation to slowdown considerably, with goods prices falling.

The rotation of spending back to labor-intensive services and a still-tight jobs market will, however, likely keep inflation above the Fed's 2% target.

The U.S. central bank early this month delivered a fourth consecutive 75-basis-point interest rate hike, but signaled it may be nearing an inflection point in what has become the fastest rate hiking cycle since the 1980s.

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

Stocks on Wall Street rallied. The dollar slipped against a basket of currencies. U.S. Treasury yields fell.

MODERATE READINGS

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

"The Fed cares about producer prices to the extent they pass through to consumer prices," said Will Compernolle, senior economist at FHN Financial in New York. "The most stubborn parts of CPI inflation in core services, like shelter, won't be influenced anytime soon from improvements in producer prices."

Services fell 0.1%, the first decline since November 2020, after rising 0.2% in September. There were decreases in trade services, which measure changes in profits received by wholesalers and retailers. Prices for transportation and warehousing services fell 0.2%.

The costs of portfolio management, long-distance motor carrying, automobile retailing as well as professional and commercial equipment wholesaling also declined.

But prices for hospital inpatient care increased 0.8%. There were also increases in prices for securities brokerage and dealing, apparel wholesaling and airline passenger services. Airline tickets rose 2.1%.

Services excluding trade, transportation and warehousing increased 0.2%. Core services shot up 0.5% in September.

Excluding the volatile food, energy and trade services components, producer prices rose 0.2% in October. The core PPI advanced 0.3% in September. In the 12 months through October, the core PPI rose 5.4% after increasing 5.6% in September.

With the CPI and PPI data in hand, economists estimate that the core personal consumption expenditures (PCE) price index gained between 0.2% and 0.3% in October after climbing 0.5% in September. The core PCE price index is forecast rising 5.0% on a year-on-year basis after increasing 5.1% in September. The Fed tracks the PCE price indexes for its inflation target.

Some worried about the rise in most medical services components in October, which they said were driven by wages.

"This could be an even more concerning inflation dynamic for Fed officials that have been hesitant to acknowledge wages as a driver of strong price inflation," said Veronica Clark, an economist at Citigroup in New York.