Wholesale prices rose less than expected in December, amid recent market concerns that inflation may not be falling as quickly as expected toward the Federal Reserve’s 2% target. This was a positive sign for the economy.
The Producer Price Index (PPI), which tracks price changes seen by businesses, rose 3.3% year over year, up from 3% in November, but economists said in a Tuesday report from the Bureau of Labor Statistics. The increase rate did not reach 3.5%. It was projecting. On a monthly basis, the inflation rate was 0.2%, lower than the 0.4% rise expected by economists.
“Core” prices, which exclude food and energy, rose 3.5% from a year earlier, exceeding the 3.4% rise in November. Economists had expected a 3.8% increase. Meanwhile, core prices remained unchanged month-on-month, lower than economists’ expectations for a 0.3% rise and the 0.2% increase seen last month.
Thomas Ryan, North American economist at Capital Economics, said the announcement “looks reassuring,” but noted that “price increases in several key components that are directly reflected in the Fed’s preferred core PCE inflation measure… “It’s covering up,” he said. Notably, domestic and international airfares, which make up the personal consumption expenditures (PCE) index, the Fed’s recommended inflation measure, soared in December.
Morgan Stanley’s economics team has revised its December core PCE inflation forecast upward in response to the announcement. The company currently believes December prices rose 0.23% month-on-month, beating the pre-announcement estimate of 0.21%.
Thursday’s PPI reading comes one day before the release of the much-anticipated December Consumer Price Index (CPI). Economists see little progress in the print, forecasting core inflation to remain at an annual rate of 3.3% for the fifth consecutive month. More detailed forecasts on PCE will be updated after Wednesday’s CPI release.
National senior economist Ben Ayers argued Tuesday’s softer-than-expected PPI should dampen the “upper bound on expectations for tomorrow’s CPI report.”
After recent strong labor data, many economists believe the Fed will need to see signs of subduing inflation in the coming months before cutting rates again this year.
As of Tuesday morning, markets were pricing in just a 3% chance that the Fed would cut rates at its January meeting, according to the CME FedWatch tool. Markets believe there is a greater than 50% chance that the Fed will cut interest rates at its meetings through at least June.
Josh Schafer is a reporter for Yahoo Finance. X Follow him at @_joshschafer.
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