There was good economic news on Tuesday as a key indicator of future prices was eight percent year-on-year for October (ahead of expectations), giving hope that inflation can be reduced to more typical levels in 2023.
The latest reading of the Producer Price Index, published by The Bureau of Labor Statistics (BLS), was the lowest since July 2021. The consensus among economists was for an 8.3 percent increase. Month-on-month, the final demand increased 0.2 percent in October.
According to the BLS, “most of the October increase can be traced to a 2.7-percent jump in prices for final demand energy.”
So-called ‘core’ producer price inflation, which excludes foods and energy, came in lower-than-expected at 6.7 percent year-on-year, having been forecast at 7.2 percent.
While the PPI reading is only one data point, it is a cause for optimism. If inflation falls faster than anticipated, the Federal Reserve won’t have to raise its target funds rate quite as aggressively.
Federal Reserve Chair Jerome Powell said at the last press meeting (after raising rates by 75 basis points) it would be “appropriate to slow the pace of increases, as we approach the level of interest rates that will be sufficiently restrictive to bring inflation down to our two percent goal.”
Inflation is the top worry for Americans right now, with 27 percent of voters saying it’s the top issue in the most recent Economist / YouGov survey.
Consumer Price Index, which is the standard measure of inflation, has been at a 40-year high in 2022, and has only started to fall from the peak of 9.1 percent in June.
The October reading was 7.7 percent, which is still much higher than the Federal Reserve’s target rate of around two percent.
U.S. markets reacted positively to the data, with bond yields on the the benchmark 10-year bond dropping 0.06 percentage points to around 3.80 percent, and the US500 stock index up around 1.75 percent.
Overall, PPI is often described as a leading indicator to inflation, given that what producers see is what consumers get several months later. In reality, PPI and CPI track each other quite closely, although PPI tends to be more extreme (greater highs and lows) and more volatile.
Robert Pavlik, Senior Portfolio Manager at Dakota Wealth, told Reuters: “The headline number is way better than expected, and the core number is again way better than expected. It’s going to confirm people’s hopes that inflation is starting to turn the corner. It’s going to give the market more confidence.”
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