The December Final Demand Producer Price Index declined 0.2% from November but was up 2.5% year-over-year. The core PPI – excluding food, energy, and trade – was flat month-over-month and up 2.8% compared to a year-ago. The overall decline was more than expected by a market survey. However, the reason was entirely anticipated from the energy component which had a second month in a row of sharp decreases (-5.4% in December and -5.0% in November). Food prices were up for a third month in a row (+2.6% in December, +1.3% in November, and +1.0% in October) but could not offset the drop in energy when combined with the 0.3% decrease in trade services.
The PPI is not among the closest-watched by the FOMC of the inflation reports. Nonetheless, the numbers point to a similar story as the CPI with prices appearing to be sustained at levels nearer the Fed’s symmetric 2% objective. Rhetoric from Fed policymakers in recent months have emphasized that monetary policy is “data dependent” and as such future decisions will take into account the available numbers in reference to the dual mandate. Hints that inflation has eased off – even if due to factors normally spoken of as “transitory” or “temporary” will need to be balanced against the strength of the labor market and if there are signs that wage inflation is sparking price increases. In the case of the PPI it pass-through from tariffs will affect the direction of the index as well as other production costs.
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