Daily Management Review

Unexpected Decline In US Producer Prices Results In Ongoing Goods Deflation


Unexpected Decline In US Producer Prices Results In Ongoing Goods Deflation
Declining prices for commodities like food and diesel fuel caused U.S. producer prices to drop unexpectedly in December, indicating that inflation would continue to decline and the Federal Reserve could begin lowering interest rates this year.
The Labour Department's report released on Friday suggested that the increase in consumer prices last month was probably an exception, since it also revealed that service costs remained stable for the third consecutive month. This led economists to predict that December saw a modest increase in the main price indicators that the US central bank monitors in order to meet its 2% inflation objective.
"The inflation pipeline is clearing and consumer prices will gradually get to the Fed's 2% target," said Jeffrey Roach, chief economist at LPL Financial in Charlotte, North Carolina.
The Labour Department's Bureau of Labour Statistics said that last month's producer pricing index for final demand decreased by 0.1%. Revisions to the data for November indicate that the PPI fell by 0.1%, as opposed to the previously reported 0.1% increase. Now, the PPI has decreased for three months running.
According to Reuters polled economists, the PPI was expected to increase by 0.1%. The cost of diesel fuel decreased by 12.4%, which accounted for half of the 0.4% decrease in goods prices.
Nov. saw a 0.3% decline in goods prices. They have fallen for the past three months in a row. After increasing by 0.1% in November, goods prices were steady when food and energy were excluded.
Additionally, the weakening implied that goods deflation persisted even after consumer goods prices increased in December after two consecutive months of declines.
Although food costs decreased by 0.9% last month—with the price of eggs plunging by 20.5%—they only partially undid the 71.2% increase that occurred in November. A bird flu outbreak at a few commercial farms was the cause of the November price increase. Passenger automobile wholesale prices decreased by 3.0%. However, the cost of petrol rose by 2.1%.
The PPI grew by 1.0% in the 12 months that ended in December, following a 0.8% gain in November. Consumer prices rose more than anticipated in December, according to data released on Thursday, primarily due to increases in the cost of housing and healthcare.
In relation to a currency basket, the dollar declined. While markets were divided, U.S. Treasury prices were generally up.
Financial markets remain confident that the Fed will start decreasing interest rates in March, though most analysts are leaning towards May or June, given the labour market's durability. Since March 2022, the central bank has increased its policy rate by 525 basis points, bringing it to the current range of 5.25% to 5.50%.
Declines in margins for motor vehicle and machinery wholesale restrained the cost of services. Room rates at hotels and motels increased by 2.1%. The costs of wholesale clothing, car and part sales and freight transportation by road also saw declines.
However, in line with recent increases in the stock market, portfolio management fees increased by 1.5%. Fares on airlines went up 2.1%. The cost of health and medical insurance increased by 0.1%.
With supply chains substantially normalised following major disruptions during the COVID-19 epidemic, services are at the focus of the inflation battle. Rate increases have less of an impact on services inflation, which is partially caused by a tight labour market.
The personal consumption expenditures price indexes, which are inflation indices that the Fed tracks for monetary policy, are calculated using a variety of components, including airline tickets, hotel and motel rooms, healthcare costs, and portfolio management fees.
Economists projected that the PCE price index, which excludes food and energy, increased by 0.2% in December following gains of 0.1% in November and October based on the CPI and PPI figures.
It was projected that the so-called core PCE price would rise by 3.0% in the year ending in December. That would be the weakest year-on-year improvement since March 2021 and follow a 3.2% rise in November.
December is expected to see an overall increase in the PCE price index of 0.2%, with an annual increase of roughly 2.6%, which is unchanged from November's gain.
Some analysts expressed concern that the Middle East conflict and attacks on Red Sea container ships by Houthi militants affiliated with Iran, which have caused corporations to reroute boats and drastically increase costs along with insurance premiums, could lead to an increase in the price of oil and other goods.
However, some anticipated that the impact on consumers would be mitigated by rising oil output in the US.
After increasing 0.1% in November, the PPI's narrower measure—which excludes components related to trade, energy, and food—rose 0.2% in December. Following a 2.4% increase in November, the so-called core PPI increased 2.5% year over year.
"The key upside risk to inflation is from the war in the Middle East and potential disruptions to trade flows and global energy supplies," said Bill Adams, chief economist at Comerica Bank in Dallas. "But petroleum and renewables output are growing faster than GDP in the U.S., which so far has offset the impact of geopolitical risk and kept energy prices well behaved."