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• The PPI for final demand increased 0.1% in November after a more pronounced 0.6% increase the month before.
• The PPI rose 2.5% in the 12 months through November, down 0.4% annually from the month before.
• The core PPI which excludes food, energy, and trade services increased 0.3% last month, and increased 2.8% in the 12 months through November.

The price rise was slightly unexpected, with Reuters economists predicting no change in the November PPI reading and a 2.5% rise on an annual basis.

The PCE (personal consumption expenditures) price index excluding food and energy increased 1.8% in October, the smallest increase since February with a similarly low reading of 1.9% in September. The PCE is the Federal Reserve’s preferred measure of inflation, and the recent financial data points to a softening in inflation measures.

The core PCE price index matched the target inflation rate of 2% outlined by the Fed for the first time since April 2012 in March, and the fed is expected to go ahead with a fourth rate hike in December as planned, with the minutes from the most recent FOMC meeting supporting this.

However, the monetary policy regarding rate hikes in 2019 is far less certain, with the Fed’s suggested 4 rate hikes in sharp contrast with the 2 recommended by the market.

Rising Prices

Wholesale food prices increased by 1.3% last month with gains in the cost of eggs and vegetables driving prices. Food prices also increased 1% in October. Wholesale energy prices underwent a 5% drop, the largest decrease since September 2015. Gasoline prices dropped even further with a 14% drop, the biggest since February 2016 after a 7.6% surge the month before.

Wholesale goods overall dropped 0.4% in November, the biggest decrease since May 2017 after a 0.6% increase in October, and core goods rose 0.3% after no change in October prices from the month before.

The spike in core goods prices is most likely due to the tariffs introduced in the US on lumber, aluminum, and steel imports as a result of the trade war which also affects a range of Chinese goods. Last month also saw a rise in the price of iron and steel scrap along with products from steel mills.

Service costs increased by 0.3% in November after a 0.7% gain in October. The November spike is partially due to a 0.3% gain in trade services (changes in margins received by wholesalers and retailers).

Healthcare services increased in price by 0.1% last month with hospital outpatient and inpatient care becoming more expensive along with dental and nursing home care. Healthcare prices increased by 0.3% the month before. 

Expert Outlook

“Underlying inflation is more likely to head up than down in 2019, though in the short run, the plunge in energy prices will keep headline inflation under wraps,” said Stephen Stanley, chief economist of Amherst Pierpont Securities.

“No alarm bells ringing. Trends are broadly what they were except for services prices which move in fits and starts sometimes,” said chief economist Robert Brusca of FAO Economics.

Market Reaction

Gold held intraday gains as the dollar lost some value following the PPI data. Spot gold saw a high of $1,249.46/oz and a low of $1,241.80/oz and is currently trading at $1,244.05/oz and up 0.03%.