On Thursday (December 14th), the U.S. Bureau of Labor Statistics announced that the Producer Price Index (PPI) showed an unexpected acceleration in inflation. The PPI rose by 0.4% from the previous month in November, marking the largest increase since June and surpassing market expectations of 0.2%. The year-over-year data is also noteworthy, with the PPI rising 3% from the same period last year, the largest jump since the beginning of 2023.
Food Prices Drive Up PPI
The rise in PPI is primarily attributed to the surge in food prices, with egg prices soaring by 55% month-on-month. The bureau noted that overall commodity prices increased by 0.7%, the largest rise since January this year, with over 80% of the increase linked to higher food costs.
Although the rise in other PPI categories slowed, such as service costs increasing by just 0.2%, the lowest in four months, the strong growth in food prices overshadowed these mitigating factors. Core PPI, excluding food and energy, rose by 0.2% month-on-month and increased by 3.4% year-over-year.
Impact of CPI and PPI on Future Policy
CPI data released on Wednesday showed that U.S. core inflation remained robust for the fourth consecutive month, indicating that overall price pressures have not significantly eased. The back-to-back release of PPI and CPI heightened market concerns about persistent inflation and created uncertainty regarding future price and interest rate policy prospects.
Particularly, the market is closely monitoring the impact of the PPI report on the Personal Consumption Expenditures Price Index (PCE), a key measure for the Federal Reserve. Economists expect the PCE to rise by only 0.1% in November, the smallest increase in six months. This modest inflation performance further strengthens market expectations of a 25-basis-point interest rate cut by the Federal Reserve next week.
Economists from Bank of America wrote in a report: "If the PCE data meets expectations, it will ease recent inflation concerns and reinforce our confidence in a rate cut next week."
Weak Performance in Employment Data
Other data released on Thursday showed some signs of weakness in the U.S. labor market. Initial claims for unemployment benefits rose to a two-week high last week, and continued claims during the Thanksgiving week also increased. This suggests that although the overall labor market remains healthy, seasonal fluctuations may be affecting short-term data.
Inflation and Policy Adjustments
With Trump's threat to raise import tariffs and unexpected inflation data fluctuations, the direction of Federal Reserve policy has garnered more attention. Despite short-term concerns sparked by the November PPI data, the market remains optimistic about a slowdown in inflation next year and further rate cuts by the Federal Reserve.
Amidst the backdrop of food prices driving inflation, future trends in core goods and service prices will be crucial observation points. The market generally expects the Federal Reserve to cut rates by 25 basis points at the December policy meeting, but the pace of rate cuts next year may be more cautious. The PCE data will provide further directional guidance in the coming weeks, helping the market better interpret changes in the future economic and policy environment.
