US Producer Prices Rose Less Than Expected in December, Signaling Slowing Inflation

 

US producer prices rose lower than expected in December, increasing the likelihood of slowing inflation and reducing market concerns about higher-than-expected inflation.

 

A report released by the Bureau of Labor Statistics on Tuesday (January 14th) showed that the producer price index (PPI) rose 3.3% year-over-year, above November's 3% but below economists predicted 3.5%. Monthly, prices rose 0.2%, softer than economists' expectations of 0.4%.

 

Core prices, which exclude food and energy, rose 3.5% YoY, up from November's 3.4% increase but down from the projected 3.8% gain. Month-over-month core prices were consistent, less than the expected 0.3% increase and November's 0.2% growth.

 

Thomas Ryan, Capital Economics North America economist, noted that the data, while positive, showed that US domestic and international airfares, components of the Personal Consumption Expenditure (PCE) Index, surged in December. PCE is the Federal Reserve's favored reference indicator for adjusting interest rates.

 

Morgan Stanley raised its MoM core PCE inflation estimate for December from 0.21% to 0.23%.

 

Economists are split on the impact of Tuesday's PPI data on Wednesday's CPI data. Most economists expected the CPI data to be virtually unchanged, with core inflation expected to reach an annualized level of 3.3% for the fifth consecutive month. Stephen Stanley, chief economist at Santander US Capital Markets, believed that the weak PPI data could not guarantee that incoming CPI would grow less than expected. Ben Ayers, a nationwide senior economist, deemed that the lower-than-expected PPI should alleviate higher expectations for CPI data.

 

However, it is universally believed that the Fed will cut the rate further in 2025 after inflation has dropped for several months.

 

According to the CME FedWatch Tool, markets see a 3% chance of a Fed rate cut in January. Markets expect no more than a 50% chance the Fed will cut rates in June.