The United States is starting 2024 with supply-side price pressures in check.
US producer prices fell in December for the third consecutive month, bringing a closely watched gauge of inflation to a rate more in line with pre-pandemic times.
Wholesale inflation as measured by the Producer Price Index rose 1% annually in December, up slightly from November’s revised 0.8% reading, according to data released Friday by the Bureau of Labor Statistics. When stripping out the food and energy categories, which tend to be volatile, core PPI was flat for the month, bringing the yearly increase down from 2% to 1.8%.
“One data point doesn’t make a trend; two data points can be a bit spurious; we’ve now got three consecutive months of top-line [PPI] declines on a month-to-month basis,” Kurt Rankin, senior economist at PNC Financial Services, said in an interview with CNN.
Considering the annual top-line and core readings, Rankin noted, “there’s clearly no supply-side price pressure headed through the US economy in 2024.”
PPI captures average price shifts before they reach consumers and serves as a potential signal for the prices consumers ultimately end up paying. On Thursday, the December Consumer Price Index, which is the most widely used measure of retail inflation, showed prices rose annually by 3.4%.
The December PPI report shows that “non-tradeable prices, i.e., shelter prices” will continue to drive future increases in the CPI, wrote Eugenio Aleman, Raymond James’ chief economist, in a note Friday.
And as it stands right now — barring any unexpected supply shocks — there are no significant price increases flowing from upstream.
“Producers are not facing costs that need to be pushed through to consumers in order to maintain their bottom lines that would reignite inflation,” Rankin said. “That’s all down to consumer demand as we look to inflation on the broader economy in 2024.”
He added: “As long as consumers are willing to pay a higher price, retailers are going to oblige; they’re going to take these lower-cost goods and turn them into profits for themselves across business sectors.”
‘Businesses will not have to react as sharply’
Since peaking at a record 11.7% in March 2022, wholesale inflation has cooled drastically, especially during the past year, dropping from an annual 6.4% rate in December 2022 to the modest reading posted Friday.
On a monthly basis, prices fell 0.1%, notching a third straight month of declines, with November’s previously flat reading revised down to a 0.1% drop. Those followed October’s sharp 0.4% decline, which was influenced by a steep contraction in energy and gas prices.
In December, final demand goods prices fell for the third consecutive month with a drop of 0.4% that was helped lower by falling food (-0.9%) and energy prices (-1.2%). Final demand services prices were unchanged for the third month in a row.
Economists projected that PPI, which measures the average price changes that businesses pay to suppliers, would pick up by 0.2% for the month and rise 1.4% for the 12 months ended in December, according to FactSet estimates.
Friday’s report is one of the last major pieces of inflation data (with the critical Personal Consumption Expenditures data scheduled for January 26) to land before the Federal Reserve’s policymaking meeting at the end of the month. The US central bank has become increasingly data dependent in its campaign to bring down inflation.
The Fed is expected to hold its benchmark rate steady for the fourth consecutive meeting, keeping interest rates at 23-year highs, according to CME FedWatch projections. Fed officials have signaled that three rate cuts could be on the books this year, which PNC is forecasting will occur in the second half of the year (followed by “several more” in 2025), Rankin said.
“That ‘higher-for-longer’ trend in interest rates will put pressure on businesses, but lower costs — as we saw in [Friday’s] PPI report and the last couple of those reports — will help to offset that,” he said. “Businesses will not have to react as sharply to maintain the bottom line to accommodate the higher interest costs that they’re facing themselves, because their input costs are either declining or flat.”
