Producer Price Index Signals Persistent Inflationary Pressures Throughout US Economy

People shop at a grocery store in Rosemead, Calif., on Aug. 14, 2024. Frederic J. Brown/AFP via Getty Images

The producer price index (PPI)—a gauge of prices paid by businesses for goods and services at the wholesale level in the United States—rose to a three-month high in October, revealing persistent price pressures in pockets of the U.S. economy.

According to the Bureau of Labor Statistics (BLS), the PPI increased to 2.4 percent year over year, up from 1.9 percent in September. Markets estimated a reading of 2.3 percent.

Producer prices rose by 0.2 percent monthly, up from 0.1 percent in September. This was in line with economists’ expectations.

The higher-than-expected print was driven by the 0.3 percent increase in prices for final demand services, while prices for final demand goods edged up to 0.1 percent.

Officials have been challenged to mitigate service inflation. While the services component in the consumer price index (CPI) is down from its January 2023 peak of 7.6 percent, the decline has been slow, remaining above 4 percent for nearly three consecutive years.

Many factors have bolstered service inflation, such as elevated wage pressures, supply chain disruptions, and strong demand.

The Institute for Supply Management’s October services purchasing managers’ index (PMI)—a measurement of the sector’s prevailing economic direction and activity—surged to its highest level since August 2022 and beat market forecasts. The PMI showed a rebound in employment and a price drop, though it slowed to a slightly higher-than-expected level.

Meanwhile, the Bureau of Labor Statistics reported that core PPI inflation, which omits the volatile energy and food components, swelled to 3.1 percent, up from 2.8 percent in the previous month. This was higher than the consensus forecast of 3 percent.

On a month-over-month basis, core producer prices jumped by 0.3 percent, up from 0.2 percent, as expected.

Additionally, the index excluding food, energy, and trade services climbed by 3.5 percent for the 12 months ending in October.

Economists monitor the PPI because it tends to lead the CPI report. The PPI is typically a potential indicator of future inflation trends since prices are reflected earlier in the supply chain process, and the costs are passed to shoppers.

Producer price inflation has climbed higher than the CPI alternative. Since April 2020, the PPI has rocketed at a cumulative pace of 35 percent. By comparison, consumer price inflation has increased by 23 percent in the same span.

The annual inflation rate rose to 2.6 percent in October from 2.4 percent in September, fueled by growing shelter costs. Core inflation was unchanged at 3.3 percent, suggesting that the final mile toward the Federal Reserve’s 2 percent target might be a difficult path to navigate.

Jeffrey Roach, chief economist for LPL Financial, believes there could be more volatility ahead for producer prices, “especially as businesses manage supply chains amid the risk of tariffs.”

“The consumer impacts from tariffs vary widely and are industry-specific as businesses often apply for exclusions or bear part of the costs,” Roach said in a note emailed to The Epoch Times.

“Consumer prices actually decelerated down to 1.7% in late 2019 after businesses adjusted to the trade war with China.”

While markets will monitor the PPI for any underlying inflation trends, the Fed is unlikely to be persuaded by the latest producer price data.

Last week, the U.S. central bank trimmed the benchmark federal funds rate by 25 basis points, lowering the range to 4.5 percent to 4.75 percent. According to the CME FedWatch Tool, monetary policymakers are expected to follow through on another quarter-point rate cut.

The next major inflation report will be the Fed’s preferred personal consumption expenditure (PCE) price index. The Cleveland Fed’s Inflation Nowcast model signals a 2.3 percent inflation reading.

Market Reaction

U.S. stocks were subdued after the latest PPI report, as the leading benchmark indexes were flat. Investors are determining if the post-election rally—the blue-chip Dow Jones Industrial Average has soared 4 percent since the market close on Election Day—still has legs.

“The market has to recalibrate because there’s been a lot of concerns that valuations have gotten out of whack,” Nancy Tengler, chief executive officer and chief information officer at Laffer Tengler Investments, said in a note emailed to The Epoch Times.

Treasury yields were mainly up across the board, with the benchmark 10-year yield firming above 4.47 percent. The 2- and 30-year yields climbed to 4.3 percent and 4.64 percent, respectively.

The U.S. dollar index, a metric of the greenback against a weighted basket of currencies, surged to nearly 107.00 on Nov. 14. The index is up by 2.2 percent this week and has rocketed by 5.4 percent year to date.