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The Producer Prices Index (PPI) for February has clocked in at a 0.1% rise, below market expectations of 0.2% but recovering from the -0.1% drop the month before.

Key Takeaways

• The February PPI came in at 0.1% vs 0.2% expected and after a -0.1% drop in January.
• The less-volatile core-PPI rose 0.1% after rising 0.3% in January.
• Producer prices rose 1.9% annually and the core index rose 2.5% annually – inflation pressure is viewed as tame.

The PPI has risen slightly below market expectations, pointing to tame inflation pressure despite the strong labor market. The cost for energy rebounded from a -3.8% drop in January, rising to 1.8% in February. Prices for food continued to drop but at a slower pace, with a reading of -0.3% in February vs -1.7% the month prior.

After rising 0.3% in January, the cost of services saw no change in. On a yearly basis, the PPI rose 1.9% in February and the core-index which excludes the volatile components of food and energy rose 2.5%. Core-PPI saw reduced growth on a monthly basis, climbing 0.1% vs 0.3% in January.

US Producer Prices averaged 109.31 Index Points from 2009 to 2019, reaching an all-time high of 117.3 in November 2018 with the lowest point being in November 2009 at 100.2 points. February marks the third month in a row where core inflation has come in at below market expectations.

Prices and Policy

Prices for traveler accommodation services saw a 5.3% increase, while the indexes for portfolio management, wholesaling of equipment, parts, machinery and supplies, legal services, and food retailing all saw increases.

Fuels and lubricant price margins dropped 10.5%. The indexes for apparel, footwear, jewelry, accessories, airline passenger services, health, beauty, optical goods, and non-residential real estate services also dropped.

The producer price index is a leading indicator of upcoming changes in consumer prices, as wholesalers tend to pass on changes in profit margins to consumers.

PPI also helps inform the US Federal Reserve on inflation pressure and corresponding monetary policy surrounding interest rate hikes – the current data raises the downside risk to consumer inflation pressure, and supports the view that the Fed will not be increasing interest rates in the near future, as indicated on Sunday by Fed Chairman Jerome Powell.

PPI release confirming the y-day's CPI, underlying price pressure is far from threatening. New core measure down at a 17 month low pic.twitter.com/oRfSpXW4t2

— econhedge (@econhedge) March 13, 2019

Market Reaction

Gold is holding firmly above $1,300/oz following the release of the PPI report and a Durable Goods Orders report which came in above market expectations.

Spot gold last traded at $1,307.97/oz, up 0.90% with a range of between $1,309.14/oz and $1,298.16. After breaking the line of resistance gold is now holding gains and performing well early on in the session.

Some analysts have stated that the recent PPI report is bullish for gold simply because it minimizes the role of the Fed in monetary policy, strengthening the use case for the “hands off” approach suggested by both Fed officials and market participants in recent months.

April Comex Futures are up 0.67% and last traded at $1,306.80/oz.