Implications: With two consecutive months of declines for the producer price index – and prices down at a 0.3% annual rate in the past three months - are we seeing a softening in inflation that justifies the bears' calls for a prolonged Fed pause? Not even close. Strip out the ever-volatile food and energy categories - which fell 1.7% and 3.8%, respectively, in January – and producer prices rose 0.3%. And the pace of "core" inflation stands comfortably above the Fed's inflation target, up 2.6% in the past year (if you are feeling a bit of deja vu, yesterday's report on consumer prices showed a similar pattern). In fact, outside of food and energy, not a single other major category of final demand prices fell in January. Within core PPI, prices for trade services (think wholesaler margins) rose 0.8%, and transportation & warehousing services increased 0.5%. Notably, private capital equipment prices rose 0.6% in January, and are up 3.7% in the past year, possibly signaling rising business investment which will provide a boost to economic activity in the year ahead. In other words, policymakers in Washington, DC – both Republicans and Democrats – need to stop wasting time trying to manipulate how companies use their resources. Looking further down the price pipeline suggests we will continue to see some volatility in the month-to-month readings for the producer price index. But with both the ISM Manufacturing and Non-Manufacturing indices comfortably in expansion territory, and an increasingly-tight labor market for qualified labor to both produce and transport goods, we expect wages - and general prices – will push higher at a faster pace in the year ahead. At the end of the day, the trend in core prices – where the Fed will focus their attention – suggests inflation of around 2.5% in 2019.
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