U.S. producer prices unexpectedly rose in November as increases in the costs for services offset a sharp decline for energy products, but the overall momentum in wholesale inflation appears to be slowing.
With oil prices down sharply since October, inflation at the factory gate is likely to slow further in the coming months. The report on Tuesday did not change expectations the U.S. Federal Reserve will raise interest rates at its Dec. 18-19 policy meeting. The central bank has hiked rates three times this year.
“All systems are go for a fourth rate hike this year when Fed officials meet next week,” said Chris Rupkey, chief economist at MUFG in New York. “In many economic cycles over the last twenty to thirty years, a spike in energy prices was the spark that led to the inflation fire, and right now there is no energy price inflation to be seen.”
The Labor Department said on Tuesday its producer price index for final demand edged up 0.1 per cent last month after jumping 0.6 per cent in October. In the 12 months through November, the PPI rose 2.5 per cent, slowing from October’s 2.9 per cent surge.
Economists polled by Reuters had forecast the PPI to be unchanged in November and rise 2.5 per cent year-on-year.
But underlying producer inflation remains firm. A key gauge of underlying producer price pressures that excludes food, energy and trade services increased 0.3 per cent last month.
The so-called core PPI gained 0.2 per cent in October. In the 12 months through November, the core PPI increased 2.8 per cent, matching October’s gain.
U.S. stocks were trading higher, boosted by signs of progress to resolve the U.S.-China trade dispute, which has roiled financial markets for months. U.S. Treasury yields rose slightly and the dollar firmed against a basket of currencies.
Inflation measures have generally been softening, partly because of oil prices, which have fallen sharply since October on signs of an economic slowdown. Brent crude oil prices have dropped almost 30 per cent.
MODERATE INFLATION
The Fed’s preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, increased 1.8 per cent in October.
That was the smallest gain since February and followed a 1.9 per cent increase in September. The core PCE price index hit the Fed’s 2 per cent inflation target in March for the first time since April 2012.
Economists believe moderate inflation and expectations of slower economic growth could prompt the U.S. central bank to temporarily stop raising rates rate next year.
Minutes of the Fed’s November policy meeting published last month showed nearly all officials agreed another rate hike was “likely to be warranted fairly soon,” but also opened debate on when to pause further monetary policy tightening.
“The bar for inflation returning to 2 per cent is fairly high,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “This may give the central bank reason to pause this tightening some time next year.”
In November, wholesale energy prices tumbled 5.0 per cent, the largest drop since September 2015. Gasoline prices plunged 14.0 per cent, the biggest decline since February 2016, after surging 7.6 per cent in the prior month.
Food prices shot up 1.3 per cent last month, driven by jumps in the cost of chicken eggs and fresh and dry vegetables. Food prices rebounded 1.0 per cent in October.
Overall, the cost of wholesale goods fell 0.4 per cent in November, the largest drop since May 2017, after shooting up 0.6 per cent in October. Core goods rose 0.3 per cent last month after being unchanged in October.
The rise in core goods prices likely reflects the impact of the Trump administration’s tariffs on lumber, steel and aluminum imports, as well as on a range of Chinese goods. Last month, there were increases in the prices of machinery, iron and steel scrap as well as steel mill products.
The cost of services increased 0.3 per cent in November, boosted by a 0.3 per cent gain in the index for trade services, which measures changes in margins received by wholesalers and retailers. Services vaulted 0.7 per cent in October.
The cost of health care services edged up 0.1 per cent last month. There were increases in prices for hospital outpatient, hospital in-patient, dental and nursing home care. Healthcare prices increased 0.3 per cent in October.
Those health care costs feed into the core PCE price index.