Implications: Producer prices were flat in the month of October, but continue to accelerate on an annual basis, with the change in prices from a year ago showing the largest increase in nearly two years. Service prices declined 0.3% in October, led by declining costs for securities brokerage, dealing, investment advice, and related services, which fell 5.7% - the BLS says this was a function of low interest rates. That's clearly changed. But, while services prices are only up a moderate 0.2% at an annual rate over the last six months – prices for goods are accelerating. Goods prices rose 0.4% in October led by a 2.5% jump in energy prices which more than offset a 0.8% decline in food prices. Since mid-2014, goods prices, impacted by falling energy costs, have largely trailed those for services. This is reversing as oil prices rise, and goods prices are up at a 3.8% annual rate in the past six months, a sharp acceleration from the year-to-year increase of just 0.3%. We expect that story to continue in the months ahead as a headwind from energy turns into a tailwind. As with consumer prices, we expect that tailwind to push producer prices toward the Fed's 2% inflation target. Stripping out the volatile food and energy categories, "core" producer prices declined 0.2% in October but are up 1.2% in the past year, a significant pickup from the 0.2% rise through the twelve months ending October 2015. Taken as a whole, today's benign report on inflation is unlikely to sway the Fed away from a December rate hike that looks all but assured at this point. Barring a large surprise to the downside for the November jobs report, we will finally see the long awaited (and clearly appropriate) next step towards making monetary policy slightly less loose.
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