The Bureau of Labor Statistics’ latest report reveals that wholesale prices in December rose at a slower pace than anticipated, providing a positive signal amid concerns about inflation’s persistence.
The Producer Price Index (PPI), which tracks price changes faced by businesses, increased 3.3% year-over-year, slightly higher than November’s 3% rise but below economists’ projections of 3.5%. Every month, wholesale prices rose just 0.2%, falling short of the expected 0.4% increase.
Core Prices Show Mixed Results
Excluding volatile categories like food and energy, core PPI rose 3.5% year-over-year, a modest uptick from November’s 3.4% but still below the 3.8% economists had predicted. Every month, core prices were unchanged, contrasting with both November’s 0.2% increase and the expected 0.3% gain.
Economist Thomas Ryan of Capital Economics North America found the report “encouraging” overall but cautioned that some components, such as domestic and international airfare prices, showed notable jumps. These price changes could influence the Federal Reserve’s preferred inflation metric, the Personal Consumption Expenditures (PCE) index.
Market and Fed Expectations
The release prompted Morgan Stanley to revise its forecast for core PCE inflation, now expecting a 0.23% month-over-month increase for December, up from the previously estimated 0.21%.
The PPI report precedes Wednesday’s eagerly awaited Consumer Price Index (CPI) data, which is expected to show little change in core inflation at an annual rate of 3.3%, maintaining this level for the fifth consecutive month. Nationwide senior economist Ben Ayers suggested the softer PPI figures could temper “higher-end expectations” for the CPI.
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Impact on Federal Reserve Policy
Despite signs of easing inflation, a recent strong labor report has reinforced the belief among economists that clearer evidence of cooling inflation will be necessary before the Federal Reserve considers further interest rate cuts.
As of Tuesday morning, markets indicate only a 3% chance of a rate cut during the Fed’s January meeting, according to the CME FedWatch Tool. Current expectations suggest there won’t be more than a 50% chance of a rate cut until at least June.
Looking Ahead
While the softer-than-expected PPI data provides some hope for moderating inflation, key metrics like the CPI and PCE will shape the economic narrative in the coming months. Analysts will be closely monitoring these numbers as the Federal Reserve balances its monetary policy goals.
