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The cost of US goods and services rose at the fastest pace in six months in October, driven by a steep increase in gas prices. The producer price index (PPI) rose 0.4% last month, above market expectations of 0.3%.

Key Takeways

• The PPI rose 0.4% in October, slightly higher than expected.
• In the 12 months through October, wholesale inflation fell to a three-year low from 1.4% to 1.1%.
• The annual rate had risen to 3.4% less than two years ago, highlighting the recent decline.

Producer prices rose last month, but the broader trend still points to an overall decline with annual inflation at a three-year low.  The wholesale cost of services rose 0.3% last month, reversing the decline seen in September. The price of goods climbed to 0.7%, with around half of the rise due to an increase in gas prices. Wholesale food costs rose 1.3%, marking the largest rise since December. Fruit and vegetables drove the rise in that category.

Wholesale costs excluding food and energy, measured as core PPI, rose a mere 0.1% last month. The 12-month core rate slowed to 1.5% from 1.7%, another three-year low. While the cost of raw and partly finished goods rose in October, prices in both categories dropped almost 4% in the last year, underscoring the broader downward trend.  Overall, there is little sign of inflation in the near future on the wholesale or consumer level.

Monetary Policy

Low inflation pressure was one of the main factors in recent monetary policy decisions made by the central bank. The Federal Reserve cut interest rates three times in 2019 after a decade of no rate cuts, and after introducing multiple rate increases in 2018. The cuts are designed to hedge against recession and bolster the economy in the face of the ongoing trade war with China as well as the worsening economic situation seen worldwide. The cost of living is rising less than 2% per year, a figure unlikely to change significantly in the near future.

#UnitedStates PPI month-on-month at 0.4% https://t.co/Wed1znej33 pic.twitter.com/3FJzQygxXd

— Trading Economics (@tEconomics) November 14, 2019

Due to the recent rate cuts, interest rates for goods like autos and homes are likely to remain low for a while, making it easier for business and households to make investments and spend funds.  Fed Chairman Jerome Powell spoke yesterday to indicate that no further rate cuts are to be expected for the time being, while also hinting that rate hikes were a long way off.

Powell forecast moderate growth but ongoing tame inflation, saying “We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth, a strong labor market, and inflation near our symmetric 2 percent objective.”

Market Reaction

The cost of gold has risen slightly following the news of ongoing tame inflation pressure in the US economy. Spot gold last traded at $1,467.05/oz, up 0.37% with a high of $1,470.30/oz and a low of $1,461.22/oz.