Producer prices in December fell the most for any single-month since April 2020, as falling costs for food and energy more than offset rising prices across most other categories, the U.S. Bureau of Labor Statistics reported.
The headline number in today’s Producer Price Index report will be heralded by some as a sign that inflation has been defeated. And while it certainly does look like peak inflation is behind us, we aren’t popping any champagne bottles just yet, states Brian Wesbury, First Trust Chief Economist. The Producer Price Index (PPI) measures the average change over time in selling prices received by domestic producers for their output.
What the above means in layman terms is that the producers’ input prices continue to rise, but price increases slowed for each of the three major final-demand components—services, goods, and construction. In other words, the rate of that rise in input prices have declined month-to-month. Slowing rate of increasing prices still equate to prices increasing and purchasing power declining.
While energy prices fell 7.9% in December and food prices declined 1.2%, “core” producer prices – which remove the typically volatile food and energy categories rose 0.1 % in December and remain up 5.5% in the past year, well exceeding the Fed’s 2% inflation target.
Looking deeper into core inflation, prices for both goods (ex-food and energy) and services (+0.2% and +0.1%, respectively) rose once again in December. The service side of the economy will be the key area to watch in 2023.
What matters most for the economy, and the financial markets, is that inflation continues to run well above the Federal Reserve’s target, writes Brian Wesbury. Additionally, he desires that the Federal Reserve tightened enough to slow inflation, but not enough to throw the economy into recession.
Expect a 25 basis point rate hike at the Fed’s meetings in two weeks, along with guidance that the Fed is prepared to continue raising rates further in 2023. The path ahead to tame inflation will test the Fed’s resolve.
References:
- https://www.ftportfolios.com/blogs/EconBlog/2023/1/18/the-producer-price-index-ppi-declined-0.5percent-in-december
- https://www.bls.gov/news.release/ppi.nr0.htm