Producer prices were 0.3% higher in December following a 0.4% increase in November. This matched the expected increase. Prices also increased on an annual basis, to 1.6% from 1.2%. The core rate was 0.2% higher after a 0.4% reading in the previous month and above expectations for a 0.1% increase. The strength was the result of increases in both service prices (63.5% weighting in the index), which rose by 0.1%, and goods prices (34.7% weighting), which rose by 0.7%.
Most of the 0.7% increase goods reading can be traced to the 2.6% rise in final demand for energy; whereas, 70% of the rise in services prices was related to the increase in prices for final demand services less trade, transportation, and warehousing, which rose 0.2%. With regard to pipeline inflation, intermediate processed goods excluding food and energy were 0.1% higher, while unprocessed core goods prices were 3.6% higher. The 12-month changes in the core processed intermediate goods and unprocessed goods were 1.4% and 13.6%, respectively—finally starting to show some much more positive pricing pressure.
Wholesale prices are finally starting to show some signs of life in the last two months, following continued goods prices deflation for the last 2-3 years. While much of this is due to the recovery/stabilisation in energy prices, we are starting to see some broadening out into other areas. It is also important to note that prices in other developed countries have also started to shows some strength. Of note was today’s release of the German producer prices data, which showed a dramatic 2.8% jump in annual prices, from just 0.8% in the previous month. While China’s PPI rose by 5.5% annually in December after a 3.3% increase. While we continue to view this recovery in inflation as being a slow and moderate one, we also think it is fair to say that we have seen the bottom in prices in 2016 and inflationary pressures are indeed rising. How much faster they rise will depend on a number of factors, including the ability of China to hold it together that much longer in the face of very high debt levels and wobble growth, the ability of the global economy to continue to withstand further dollar strength, the degree of tightness in the U.S. labour market, and the amount of stimulus in the pipeline following the Trump election. As far as the Fed is concerned, this does nothing to alter its guidance for approximately 3 interest rate increases this year, though it is still far too early to be talking about actual balance sheet reduction as is now being discussed by some of the more hawkish regional Fed presidents.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.