Producer prices were unchanged in October following a 0.3% increase in September. This was worse than the expected increase of 0.3%. Meanwhile, they did improve on an annual basis to 0.9% from 0.7%. The core rate was, however, 0.2% lower (first decline since July) after a 0.2% reading in the previous month and was below expectations for a 0.2% increase. The weakness was the result of a decline in service prices (63.5% weighting in the index), which fell by 0.3%, while goods prices (34.7% weighting) rose by 0.4%.
Most of the 0.4% increase goods reading can be traced to the 9.7% rise in final demand for gasoline; whereas, the fall in services prices was related to the decrease in prices for final demand services less trade, transportation, and warehousing. With regard to pipeline inflation, intermediate processed goods excluding food and energy were 0.2% higher, while unprocessed core goods prices were 1.1% lower. The 12-month changes in the core processed intermediate goods and unprocessed goods were 0.3% and 2.2%, respectively—finally starting to show some mildly positive pricing pressure.
Wholesale pricing pressures remain on the whole fairly weak, with headline price still rising at less than 1% per annum and core prices just 1.2% higher. However, this should continue to improve as the base effect from lower commodity prices gradually falls out and headline prices should (barring some exogenous shock) start to move back up to where the core rate of inflation currently resides. The question is really, how much higher do those headline and core rates rise? Our feeling is that they are still likely to remain relatively muted, i.e., not meaningfully above 2.0%-3.0% for some time. While the election of Donald Trump should help to move the inflation needle higher, there are also significant obstacles in the form of the stronger dollar, ongoing high levels of inventories, and only very modestly rising global end-demand growth. While this is unlikely to deter the Fed from raising rates in December, it continues to suggest that they should not be in a hurry to push them higher for fear it might be behind the curve.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.