US PPI up 0.6% in October; additional sizable rises likely

Summary: Prices received by US producers (PPI) rise by 0.6% in October, in line with expectations; annual rate steady at 8.6%; “core” PPI increases by 0.4%; energy prices, “goods pipeline inflation pressures remain very strong”; worsening supply chain bottlenecks suggest “year-on-year gains will continue to rise”; goods prices up 1.2%, services prices up 0.2%; construction prices up 6.6%.

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 recent months’ annual rates have been well above the long-term average.

The latest figures published by the Bureau of Labor Statistics indicate producer prices rose by 0.6% after seasonal adjustments in October. The increase was in line with expectations but slightly higher than September’s 0.5% increase. On a 12-month basis, the rate of producer price inflation after seasonal adjustments remained steady at 8.6%.

PPI inflation excluding foods and energy, or “core” PPI inflation, recorded 0.4% after seasonal adjustments, slightly less than the consensus expectation of a 0.5% increase but higher than September’s 0.2%. The annual rate slowed a little from 6.8% to 6.7%.

“Overall, goods pipeline inflation pressures remain very strong,” said ANZ economist Hayden Dimes.

US Treasury bond yields fell noticeably on the day as investors moved out of risky assets and the emergence of Lael Brainard as potentially the next chief of the US Fed in the not-too-distant future. By the close of business, the 2-year Treasury yield had lost 3bps to 0.42%, the 10-year yield had shed 6bps to 1.44% while the 30-year finished 7bps lower at 1.82%.

“Large energy price gains in November, alongside worsening supply chain bottlenecks, suggest that the year-on-year gains will continue to rise…even as base-effects dissipate,” said Westpac Head of New Zealand Strategy Imre Speizer. The BLS stated higher prices for final demand goods accounted for over 60% of the month’s increase after they rose by 1.2% on average. Prices of final demand services rose by 0.2% while final demand construction prices rose by 6.6%.    

The producer price index (PPI) 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.

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