Wholesale prices unexpectedly fell in December, providing a positive signal for inflation, the Labor Department said on Friday.
The producer price index fell 0.1% for the month and was up 1% at the end of 2023 from a year ago, the Labor Department said on Friday. Economists polled by Dow Jones had expected a monthly gain of 0.1%. The index rose by 6.4% in 2022.
Excluding food and energy, core PPI was flat against estimates of a 0.2% increase. PPI excluding food, energy and business services also rose 0.2%, in line with the estimate. For the full year, final demand for less food, energy and business services rose 2.5% for all of 2023, after rising 4.7% in 2022.
The PPI release comes a day after less encouraging news from the Labor Department, which said on Thursday that the prices consumers pay for goods and services rose 0.3% in December and 3.4% year-on-year. That was higher than Wall Street’s expectations and still a long way from the Fed’s 2% inflation target.
However, PPI is generally considered a better leading index because it measures the pipeline prices that companies receive for intermediate goods and services.
Markets initially reacted positively to the PPI release but eased during morning trading.
“The inflationary risks that remain in the U.S. economy clearly cannot be attributed to any upward pressure on producer costs,” said Kurt Rankin, chief economist at PNC. “Whether the survey is looking at intermediate or final producer demand, there is little or no price pressure from the supply side through 2024.”
Prices of final demand goods fell 0.4% in December, the third straight month of declines, according to the report. Diesel prices fell 12.4%, even as petrol rose 2.1%.
On the services side, which Fed officials have been watching more closely, prices were unchanged for the third month in a row. Prices in fields related to financial advice rose by 3.3%, while margins in machinery and vehicle wholesale fell by 5.5%.
The PPI measures the prices that producers pay for goods and services, while the CPI measures what consumers pay in the market. CPI also includes imports while PPI does not. However, PPI covers a wider set of goods and services.
Markets are confident that weakening signs of inflation will force the Fed to cut interest rates starting in March, even with inflation above target.
Traders in the federal funds futures market are pricing in about a 70% chance of a first-quarter percentage point cut coming at the Federal Open Market Committee’s March 19-20 meeting, according to CME Group’s FedWatch tracker. Since then, markets expect five more rate cuts, bringing the benchmark Fed Funds rate down to a target range of 3.75%-4%.
However, various Fed officials have made statements in recent days that appear to contradict the market’s bullish view. Additionally, JPMorgan Chase CEO Jamie Dimon warned on Friday that high government deficit spending, along with other factors, could make inflation firmer and rates higher than the market expects.