Summary: US producer price index (PPI) down 0.5% in December, fall greater than expected; annual rate slows to 6.2%; “core” PPI up 0.1%; Treasury yields fall noticeably, rate-rise expectations soften; lower goods prices behind result, services prices up slightly.
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 decreased by 0.5% after seasonal adjustments in December. The fall was a greater one than the 0.1% decline which had been generally expected and in contrast with November’s 0.2% rise after it was revised down from 0.3%. On a 12-month basis, the rate of producer price inflation after seasonal adjustments and revisions slowed from 7.3% in November to 6.2%.
Producer prices excluding foods and energy, or “core” PPI, increased by just 0.1% after seasonal adjustments. The result was in line with expectations but lower than November’s 0.2% rise and the annual rate slowed from November’s revised figure of 6.3% to 5.5%.
The figures came out the same morning as the latest industrial production numbers and retail sales figures. US Treasury bond yields fell noticeably on the day and, by the close of business, the 2-year Treasury yield had lost 12bps to 4.09%, the 10-year yield had shed 18bps to 3.37% while the 30-year yield finished 12bps lower at 3.54%.
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 4.59% in February, 26bps higher than the current spot rate, and then climb to an average of 4.655% in March. May futures contracts implied a 4.855% average effective federal funds rate while December contracts implied 4.425%.
The BLS stated lower prices for final demand good accounted for all the month’s decrease after they fell by 1.6% on average. Prices of final demand goods rose by 0.1%.
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.