The Producer Price Index was Unchanged in October


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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Posted on Wednesday, November 16, 2016 @ 10:53 AM

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.