PPI December Data: Wholesale prices rose less than expected in December, providing a positive signal for the economy amid concerns that inflation is not decreasing as quickly as the Federal Reserve had hoped to reach its 2% target.
The Bureau of Labor Statistics released its producer price index (PPI) report on Tuesday, revealing that wholesale prices increased by 3.3% year-over-year in December. This marked an uptick from the 3% rise seen in November but was below the 3.5% increase that economists had anticipated. On a monthly basis, prices climbed 0.2%, which was also lower than the expected 0.4% increase.
When food and energy prices are excluded, the “core” PPI registered a 3.5% increase compared to the previous year, slightly higher than November’s 3.4% growth but below economists’ forecast of 3.8%. On a month-over-month basis, core prices remained flat, with no change from November, underperforming the 0.3% rise expected by analysts.
Economist Thomas Ryan of Capital Economics in North America noted that while the PPI data seemed encouraging overall, it also masked some notable price increases in certain key components that directly influence the Federal Reserve’s preferred inflation measure, the Personal Consumption Expenditures (PCE) index. Specifically, domestic and international airfare prices saw significant jumps in December, which could impact future inflation readings, especially the PCE.
Following the release of the PPI report, Morgan Stanley’s economics team adjusted their forecast for the December core PCE inflation, now projecting a month-over-month rise of 0.23%, up from their prior expectation of 0.21%. This change indicates that while wholesale prices were somewhat softer than anticipated, inflationary pressures in key areas remain.
The PPI data was released just one day ahead of the widely anticipated December Consumer Price Index (CPI) report, which is expected to show minimal progress in curbing inflation. Economists predict that core CPI will remain at 3.3% on an annual basis for the fifth consecutive month. The release of the CPI data will provide further clarity on inflation trends and will help shape updated forecasts for PCE inflation.
Ben Ayers, a senior economist at Nationwide, noted that the softer-than-expected PPI reading could help temper the “higher end of expectations” for tomorrow’s CPI report. The expectation is that the overall CPI will continue to show persistent inflation, but the slower-than-forecasted rise in the PPI might reduce concerns about a more significant acceleration in inflation.
The recent strong labor market data has led many economists to believe that inflation needs to show further signs of cooling before the Federal Reserve will consider cutting interest rates this year. As of Tuesday morning, markets were pricing in just a 3% chance that the Fed would reduce rates at its January meeting, according to the CME FedWatch Tool. Markets are not forecasting a greater than 50% probability of rate cuts until at least June.
The Fed has been on a path of tightening monetary policy throughout 2023 to combat inflation, which reached its highest levels in four decades. While inflation has slowed from its peak, it remains well above the central bank’s 2% target, prompting the Fed to maintain its cautious stance on rate cuts. The central bank is likely to continue monitoring inflation closely, and its decisions will be influenced by upcoming data releases, including the CPI and PCE reports.
In conclusion, while the December PPI data shows a slower-than-expected rise in wholesale prices, it does not suggest that inflation is disappearing quickly. The Federal Reserve will need to see more evidence of sustained cooling inflation before making any significant policy changes. The upcoming CPI and PCE reports will provide further insights into inflationary pressures and the economic outlook for the coming months