Summary: US producer price index (PPI) up 0.2% in October, less than half expected figure; annual rate slows to 8.0%; “core” PPI flat; “disinflation evident in goods prices”; Treasury yields fall, rate-rise expectations soften.
Around the end of 2018, the annual inflation rate of the US producer price index (PPI) began a downtrend which continued through 2019. Months in which producer prices increased suggested the trend may have been coming to an end, only for it to continue, culminating in a plunge in April 2020. Figures returned to “normal” towards the end of that year but annual rates through 2021 and 2022 have been well above the long-term average.
The latest figures published by the Bureau of Labor Statistics indicate producer prices increased by 0.2% after seasonal adjustments in October. The rise was less than half the 0.5% increase which had been generally expected but in line with September’s rise after it was revised down from 0.4%. On a 12-month basis, the rate of producer price inflation after seasonal adjustments slowed from 8.4% in September to 8.0%.
Producer prices excluding foods and energy, or “core” PPI, effectively remained unchanged after seasonal adjustments. The result was less than the generally expected 0.3% increase as well as September’s 0.2% rise. The annual rate slowed from September’s revised figure of 7.1% to 6.7%.
“The data reflects ongoing improvement in supply chains and confirms the disinflation evident in goods prices,” said ANZ Head of FX Research Mahjabeen Zaman. “However, potentially far-stickier services and wage inflation is the primary concern for the Fed at this point.”
US Treasury bond yields fell on the day. By the close of business, the 2-year Treasury yield had lost 5bps to 4.34%, the 10-year yield had shed 9bps to 3.77% while the 30-year yield finished 8bps lower at 3.96%.
In terms of US Fed policy, expectations of higher federal funds rates over the next 12 months softened. At the close of business, contracts implied the effective federal funds rate would average 4.125% in December, 30bps higher than the current spot rate, and then climb to an average of 4.685% in February 2023. May 2023 futures contracts implied a 4.895% average effective federal funds rate while November 2023 contracts implied 4.485%.
The producer price index is a measure of prices received by producers for domestically produced goods, services and construction. It is put together in a fashion similar to the consumer price index (CPI) except it measures prices received from the producer’s perspective rather than from the perspective of a retailer or a consumer. It is another one of the various measures of inflation tracked by the US Fed, along with core personal consumption expenditure (PCE) price data.