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The Bureau of Labor Statistics on Friday published the Producer Price Index readings for October. Investors worried this would follow the hot reading of the Consumer Price Index released earlier this week, triggering more pressure for an up-sized rate hike at next month’s FOMC meeting.
But turns out the readings showed a better-than-expected picture. PPI-Final Demand was forecasted to rise 0.4% MoM and 6.6% YoY, but the release showed 0.3% MoM and 6.5% YoY, which looked like quite a comfortable beat, and the PPI situation is not creating extra support for a 50bps rate hike at the December meeting.
The two-year Treasury yield, which is sensitive to policy rate expectations, fell after the data was released. A problem averted.
But There Are Concerns, Lots of Them
Even though it didn’t ring the alarm bell, it is still very far from being a “good” one. First of all, we can hardly see signs of a genuine disinflation in the final demand index. The PPI-FD YoY growth rate actually reached its highest since November 2022. The MoM growth rate was 0.348% to three decimal places, meaning it was 0.2 bps away from losing the “beat” headline.
Most of the improvements we see in the headline numbers were the results of oil prices no longer rising rapidly. This was what helped to bring down the MoM growth rate from 1.41% to just below 0.35%.
Energy PPI-FD dropped 0.13% in October, a substantial improvement from the 10% monthly increase in the previous month, and it obscured the hot readings elsewhere.
Core Goods and Food Are Running Hot
One very worrying spot was core goods, i.e. goods excluding food and energy, which rose 0.55% in the month. This is the hottest reading since May.
Food also showed major inflationary pressure with the monthly growth rate shooting up to 1.34%, following September’s 1.05% increase.
Services Look Fine, Until You Take Out Trade Margins
On the services front, it doesn’t seem too bad as it only rose 0.21% MoM and maintained a 5% increase YoY, same as in September.
But remember there is an interesting item inside PPI services—trade services. Trade services is the name for the “prices” retailers and wholesalers received. But the BLS calculates them by measuring the difference between their input costs and the selling prices and uses the margin as the prices of their “services.”
In the current era of tariff policy, this trade margin can be used as an indicator of how much of the tariff is being passed through to the consumers (or from wholesalers to retailers). But another side effect of the tariff regime is that the trade margin has become more volatile. If we take the series out of PPI services, the picture is quite different in October.
While some disinflation can still be seen in the data, the monthly increase was close to 0.4%. So, what is the cause of the ex-trade margin services inflation? PPI-FD transportation and warehousing services increased 2.04% MoM in October.
This is a category that is likely reflecting the effect of high oil prices, especially the high diesel prices. Peek behind the curtain: transportation of passengers for final demand actually sees a 1.23% drop MoM. The inflationary pressure came from transportation & warehousing of goods for final demand, which rose 3.08% in a month. This is after rising 2.32% and 3.01% MoM in August and September, respectively.
The good news on this one is that diesel prices have been falling in recent weeks, which might translate into a negative reading in the next release. But this is a good example of how the impact of high fuel prices leads to elevated logistics costs, which will in turn generate even more cost pressure on other producers. If this doesn’t get contained soon, this is how the second-round inflation which central bankers most worry about is created.
But why do we have to worry about the PPI? The Fed does not target PPI. It doesn’t even target CPI. It is the PCE price index that it cares about. As long as the data that the PPI feeds into the PCE calculation are fine, then we don’t have to worry much about them. Right?
“Yes” would be the short answer. Nonetheless, PPI is a good gauge of how widely the inflationary pressure is brewing in the economy. It shows how fast the costs for products and services are rising and how much sellers are willing to raise their prices. The picture is still very far from comforting.
