US Producer Prices Top Market Estimates, Signal Sticky Inflation Ahead

A factory worker is seen at a wind tower-manufacturing plant in Pueblo, Colo., on Nov. 29, 2023. Andrew Caballero-Reynolds/AFP/Getty Images

U.S. wholesale prices rose at a higher-than-expected pace in November, signaling sticky and stubborn inflationary pressures ahead across the marketplace.

According to the Bureau of Labor Statistics (BLS), the Producer Price Index (PPI)—a gauge of changes in prices paid by businesses for goods and services—climbed 0.4 percent last month from the upwardly revised 0.3 percent increase in October.

Economists penciled in a reading of 0.2 percent.

Domestic producer prices also surged to 3 percent year over year, the biggest jump since February 2023 and above the consensus forecast of 2.6 percent.

The data were mixed. Officials said nearly two-thirds of the broad-based increase in the PPI was attributed to the 0.7 percent increase in goods. Prices for services ticked up 0.2 percent.

Within the goods category, one-quarter of the November boost resulted from a 54.6 percent spike in prices for chicken eggs. In addition, there was a sizable jump in prices for fresh and dry vegetables and fruits, processed poultry, and residential electric power.

At the same time, the indexes for oilseeds, diesel fuel, and primary basic organic chemicals.

On the services front, one-third of last month’s price increase was due to the 1.8 percent rise in margins for machinery and vehicle wholesaling. The Bureau of Labor Statistics also reported higher prices for securities brokerage, investment advice, food wholesaling, and apparel and footwear retailing.

Conversely, the indexes for airline passenger services, guestroom rentals, and computer hardware, software, and supplies retailing decreased.

Meanwhile, core PPI, which omits the volatile energy and food categories, edged up 0.2 percent, down from the 0.3 percent gain in the previous month. The number was in line with market estimates.

U.S. core producer prices swelled to an annualized rate of 3.4 percent from 3.1 percent, topping projections of 3.2 percent.

Excluding final demand for food, energy, and trade services, the PPI ticked up 0.1 percent monthly and remained unchanged at 3.5 percent year over year.

Since April 2020, producer prices have climbed approximately 37 percent cumulatively. By comparison, consumer prices have surged 23 percent in the same span.

Economists pay close attention to the PPI because it often signals broader consumer inflation in the future since it is early in the supply chain.

Sticky and Stubborn

Inflation could prove to be stickier and more stubborn than monetary policymakers realized.

Last month, the November Consumer Price Index (CPI) report rose for the second consecutive month. The annual inflation rate rose to 2.6 percent, while core CPI remained at 3.3 percent for the third straight month.

The Federal Reserve Bank of Atlanta’s sticky-price CPI—a weighted basket of goods and services that change price at a slower pace—is up 3.8 percent from a year ago. The core alternative is also up 3.9 percent.

A screen on the trading floor at the New York Stock Exchange (NYSE) display a news conference with Federal Reserve Chair Jerome Powell, on Sept. 18, 2024. Andrew Kelly/Reuters

While the Fed officials have suggested that the path back to the institution’s 2 percent target could be bumpy, they have signaled confidence that it is returning sustainably to the level. With inflation much lower than two years ago, the monetary authorities have shifted their focus to the other side of the mandate: the labor market.

However, economic observers say that the Fed will likely be more cautious heading into 2025 because of sticky inflation.

“The lack of meaningful progress on inflation means that in their summary of economic projections, officials are likely to signal just three rate cuts in 2025 versus the four they projected in September,” said James Knightley, the chief international economist at ING, in a note.

The quarterly Summary of Economic Projections is a compilation of economic forecasts from Fed officials.

Tom Essaye, the founder and president of Sevens Report Research, says the CPI numbers will likely persuade the Fed that it will reach the 2 percent target and “basically guaranteed” a December rate cut. It is what officials point to in the Summary of Economic Projections’s dot-plot that could be crucial for the markets, he said.

“The ‘dots’ from next week’s Fed meeting will be an important sign for how many rate cuts markets can expect in 2025 (the expectation is between two and three cuts so the dots need to show that to avoid disappointing markets),” Essaye said in a note emailed to The Epoch Times.

According to the CME FedWatch Tool, investors are overwhelmingly expecting a quarter-point interest rate cut at next week’s policy-making meeting of the Federal Open Market Committee (FOMC). As for January, the futures market thinks the central bank will take a breather in the rate-cutting cycle and assess the situation.

Morningstar chief U.S. economist Preston Caldwell says a rate cut this month may not be as certain as the market is penciling in.

“Markets still seem to be pricing in an overwhelming probability of a cut, but we see the outcome as more of a coin flip,” Caldwell said in a note.

The latest batch of inflation data could revitalize the discussion of balancing policy, something that Fed Chair Jerome Powell alluded to at last week’s New York Times DealBook Summit with CNBC host Andrew Ross Sorkin. Prematurely cutting could threaten to undo the inflation progress of the previous two-plus years. However, keeping rates higher for longer could harm the cooling labor market and impact growth prospects.

The next key inflation report will be the Federal Reserve’s preferred measure of the Personal Consumption Expenditures (PCE) price index. According to the Cleveland Fed’s Inflation Nowcasting model, PCE prices are expected to come in at 2.8 percent and core PCE at 3 percent.