The Producer Price Index Declined 0.1% in January


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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Posted on Thursday, February 14, 2019 @ 11:37 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.