The December PPI rose more than expected, with the strong services inflation and the prospect of rise in energy prices in the coming months signaling that pricing pressure may emerge as a concern for the Federal Reserve.
The U.S. producer price index (PPI) rose more than expected in December, a data point that takes on added significance as it is viewed as a leading indicator of consumer inflation, which the Federal Reserve uses to guide monetary policy.
Factory Gate Inflation Contained: The PPI for December rose 0.5% month over month (MoM), according to data released by the Bureau of Labor Statistics on Friday. The rate of increase accelerated from the 0.2% rate in November. Economists, on average, had expected a stable increase for December.
The BLS said the faster pace of PPI inflation has to do with the 0.7% increase in services inflation following unchanged prices in the previous month. This marked the largest increase since last July. Specifically, over 40% of the December increase in service price inflation can be traced to a 4.5-percent rise in margins for machinery and equipment wholesaling.
The annual producer price inflation rate was at 3%, the same as in November, but was more than the 2.7% rate expected by economists.
Excluding food and energy, producer prices increased 0.4% MoM compared to a 0.2% rise in November. Food prices fell 0.3%, and energy prices declined a steeper 1.4%. The West Texas Intermediate (WTI) grade crude oil prices slid about 2% in December but have since recovered.
Crude oil prices have climbed about 14% in January amid geopolitical tensions. Prices of other petroleum products, such as natural gas and heating oil, have also spiked sharply amid the brutal Arctic blast that has brought about dangerous freezing conditions across several regions in the U.S.
The annual rate of core producer prices was 3.5% in December, the same as in November.
Fed Caught Off Guard? Comments by Fed Chair Jerome Powell in the press conference that followed this week’s rate-setting meeting show that the central bank has discounted inflation moving gradually back to its 2% target.
While conceding that the core consumer price inflation remained above its target, the Fed said the elevated reading was largely reflected in the goods sector. The goods inflation, according to the central bank, has been boosted by tariff effects. It noted that the services sector is continuing to witness deflation.
Powell also noted that near-term measures of inflation expectations have declined from last year’s peaks, and that most measures of longer-term expectations remain consistent with the Fed’s 2% inflation goal.
Following the Fed meeting, most economists believe the central bank will likely be on a “long pause” and rate cuts may not come before the second half of the year.