Inflation Retreats: In October, U.S. producer prices experienced their most significant drop in three and a half years, primarily driven by a sharp decline in gasoline costs, signaling a retreat in inflation pressures. The Labor Department’s Bureau of Labor Statistics reported a 0.5% drop in the producer price index for final demand, the largest drop since April 2020. The updated September figures showed a 0.4% rise instead of 0.5%. The PPI was expected to rise 0.1%.
The PPI rose 1.3% in the year through October, down from 2.2% in September. This report follows Tuesday’s data indicating unchanged consumer prices in October. The convergence of cooling inflation, sluggish job and wage growth has solidified expectations that the Federal Reserve’s aggressive monetary policy tightening, the swiftest since the 1980s, has reached its conclusion.
Financial markets are even factoring in the likelihood of a rate cut in May 2023, according to CME Group‘s FedWatch tool. Since March 2022, the Fed has raised its policy rate by 525 basis points, settling in the current 5.25%-5.50% range.
Also Read: US Consumer Sentiment Improves: Inflation Fears Ebb, Labor Market Confidence Rises
Goods prices took a hit in October, dropping by 1.4%, with a substantial 15.3% plunge in gasoline prices responsible for over 80% of the decline. In September, goods prices had risen by 0.8%. Food prices saw a modest 0.2% decrease. Excluding the volatile energy and energy components, goods prices inched up by 0.1% last month. These core goods prices had risen by 0.2% in September. Noteworthy, the introduction of new-model-year passenger cars and light motor trucks in the October release was in line with normal practice.
Meanwhile, the cost of services remained unchanged after a 0.2% increase. Airline fares surged by 3.1%, and there were also upticks in the costs of inpatient and outpatient care, as well as road freight transportation. However, portfolio management fees and prices for motel and hotel rooms experienced declines.
Components such as airline fares and portfolio management fees play pivotal roles in calculating personal consumption expenditures price indexes, the inflation measures monitored by the Fed for its 2% target. The narrower PPI, excluding food, energy, and trade services, rose 0.1% last month after 0.3% in September. The year-over-year core PPI rose 2.9% in October, down from 3.0% in September.