By Nicholas Jasinski
Producer inflation cooled slightly in December. It is the first of a pair of highly anticipated inflation reports this week, with markets on edge and traders betting on little-to-no easing by the Federal Reserve in 2025.
The producer price index rose by 0.2% in December, according to the Bureau of Labor Statistics on Tuesday. Economists' consensus estimate called for a 0.3% increase in the PPI last month, after a 0.4% rise in November. The year-over-year change in wholesale prices jumped to 3.3%, from 3.0% a month earlier. The PPI was down 0.1% in December of 2023, a month that fell out of the calculation.
The core PPI, which excludes food and energy components, was unchanged in December. Economists had predicted the core PPI would rise 0.2%, in line with November's pace. The annual rise still accelerated to 3.5%, from 3.4% in the 12 months through November.
Rising energy prices were behind a large portion of the gain in the headline PPI last month. That subindex increased by 3.5% in December, including a 9.7% jump in gasoline prices. Energy prices were unchanged in November and rose 0.4% in October. Compared with a year earlier, however, energy costs in the December PPI were down 2.5%.
Food prices didn't change much in December, ticking down 0.1%, but remained 4.7% higher than a year earlier.
Wholesale goods prices were up 0.6% last month and up 1.8% from a year ago. When excluding food and energy prices, producers' goods costs were unchanged in December and up 2.1% year over year. Prices of fresh and dry vegetables dropped 15% during the month after soaring 33% in November.
Services inflation, meanwhile, calmed significantly in December. That subindex was unchanged last month -- its lowest reading since July 2024. But it remained 4% higher than a year ago.
With a solid economic and labor market backdrop, policymakers have tied a resumption of their interest-rate cuts to seeing more progress on slowing inflation.
The BLS will release the December consumer price index on Wednesday morning, which is forecast to show a lack of progress in slowing the pace of inflation -- as has been the case for most of late 2024.
The Fed has a 2% annual inflation target, based on yet another measure: the personal consumption expenditures price index. It incorporates elements of both the CPI and PPI, and has a lower weight in housing prices. December PCE data will be released on Jan. 31.
Economists tend to pay close attention to several components of the PPI basket which translate to the PCE price index. Those include financial services, airfares, and medical services. Airline passenger services were the standout among those categories in December: prices rose 7.2% during the month.
"All eyes are now on Wednesday's CPI report, which may be the most important inflation reading in recent memory, as it will fuel the market's Fed-obsessed sentiment," wrote Chris Brigati, chief investment officer at investment firm SWBC, on Tuesday. "A strong inflation number adds to this idea of no cuts in 2025, and potentially even a rate hike, while a weak inflation data point may help to calm the market's Fed fears."
U.S. stock index futures were rising in premarket trading on Tuesday following the PPI release, while bond yields pulled back slightly.
Stock and bond markets reacted poorly to Friday's December jobs report, which came in much stronger than expected. The ongoing U.S. economic strength has come hand in hand with above-target inflation, and markets have moved to sharply reduce the degree of Fed easing expected this year.
As of Tuesday, interest-rate futures were pricing in less than 3% odds of a decrease at the Fed's next meeting on Jan. 28-29, and the greatest likelihood of just one quarter-point cut by the end of 2025.
Write to Nicholas Jasinski at nicholas.jasinski@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
January 14, 2025 09:11 ET (14:11 GMT)
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