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Producer prices saw a slight 0.1% increase in December following no change in November according to the Labor Department, likely indicating tame inflation pressures. While the cost of goods rose, services saw price declines, keeping the overall producer price index (PPI) relatively flat and below expectations.

Key Takeaways

• PPI came in at 0.1% in December vs. 0.2% expected, and following no change in November.
• Declines in the cost of services offset gains in the cost of goods.
• The data supports the case for the Fed to keep interest rates flat in 2020.

PPI pointed to tame monthly inflation pressures below expectations, although the annual PPI gained 1.3% in the 12 months through December as expected vs. 1.1% annual gain the month before. Core PPI, which excludes the volatile components of food, energy, and trade services, came in at 0.1% for the month of December after seeing no change in November. Core PPI rose 1.5% annually last month and 1.3% the month before.

Wholesale energy prices rose 1.5% overall last month after a 0.6% gain in November. The bulk of the activity came from a 3.7% increase in gasoline prices which rose 2.3% the month prior. The cost of goods rose 0.3% in December and November, with gasoline accounting for over half of December’s price increases. Wholesale foods dipped 0.2% following a 1.1% gain in November. Core goods prices rose 0.1% last month and 0.2% the month before.

While goods prices increased, services were unchanged overall after falling 0.3% in November, the biggest drop since early 2017. The cost of healthcare services dropped 0.1% after falling 0.2% the month prior. Portfolio management fees rose 1.9% after a 1.2% gain in November.

Stabilization of producer prices as the Trump Trade War pressures ease? The year-on-year rate for durable, nondurable and consumer producer prices declined throughout 2019 until December when all three increased month/month. We expect higher industrial sector margins next week. pic.twitter.com/zgAMRbFOmj

— Barry C. Knapp (@barryknapp) January 15, 2020

Inflation

Meanwhile, consumer price data also points to tame inflation. A report released yesterday indicated sub-expectation price gains in consumer prices. Core PCE, the Fed’s preffered measure of inflation, rose 1.6% annually in November, missing the target range of 2% for the first 11 months of 2019. Data for December will be released later this month, and is expected to also miss the target range. Wage growth slipped below 3% in December despite near-record lows in unemployment.

The data supports the case for the Fed to leave interest rates unchanged for 2020 after implementing multiple rate cuts the year before, the first in over a decade. Interest rates were cut to hedge against mounting recessionary pressures stemming from the trade war and the broader global economic slowdown now underway.

Market Reaction

Gold prices have risen following the release of the report. Spot gold last traded at $1,549.92/oz, up 0.49% with a high of $1,555.88/oz and a low of $1,543.97/oz. Gold is trading in the high end of the range following the joint release of producer prices data and a report from the New York manufacturing sector. Despite the upbeat manufacturing report and the tame inflation data, spot gold has gained strong upward momentum in today’s session. A partial trade agreement is due to be signed later today by the US and China, and there are some concerns in the markets that tariffs will not be lifted on Chinese goods until later on in the year, creating tremors in the stock markets and leading to risk-averse appetites in precious metals.