US wholesale inflation accelerated slightly less than expected, closing out a week of key inflation data.
Data released Friday by the US Bureau of Labor Statistics showed that the US Producer Price Index (PPI) for October rose 6.5% year-on-year, up from 6.3% in September and the highest level since November 2022, but slightly below the market forecast of 6.6%.
After the data was released, traders modestly lowered their expectations for further Federal Reserve tightening, and US stock index futures briefly moved higher.
On a monthly basis, October PPI rose 0.3% from the prior month, below the market forecast of 0.4%. Core PPI, which excludes food and energy, held steady at 5.0% year-on-year, in line with expectations, and also rose 0.3% month-on-month. A sharp rise in food prices and climbing transportation and warehousing costs were important drivers of this month's higher wholesale inflation.
Inflation broadens across the board, with supply and demand pressures persisting
The latest PPI report showed that goods prices rose faster than services, but both posted month-on-month gains, rising in tandem for a third straight month, reflecting that price pressures have spread through multiple layers of the economy. By composition, energy prices edged lower on a monthly basis, but the year-on-year increase continued to widen, with fuel inflation especially notable; at the same time, food price gains clearly intensified.
Notably, intermediate demand prices continued to climb, indicating that upstream inflationary pressures are still building and could feed further into final consumer prices. In addition, rapid price increases for AI-related goods such as memory also had some impact on wholesale inflation, although the recent rise has stabilized somewhat.
According to Bloomberg, supply shocks in energy prices and currently strong aggregate demand together drove PPI higher this year.
Rate hike expectations remain high, corporate profits may come under pressure
After CPI data earlier this week showed core consumer inflation strengthening again, the latest PPI data further confirmed the breadth of inflationary pressure within the economy. Some Fed officials have said a more aggressive policy stance may be needed to suppress inflation.
The market currently widely expects the Fed to raise rates by 25 basis points at its two-day policy meeting ending December 9, while there is still about a 15% probability priced in for a 50 basis point hike. Based on current equity valuations, the market has not fully priced in the scenario of a larger rate increase.
In addition, the widening gap between PPI and CPI means companies face considerable pressure in passing on costs, and analysts believe this will squeeze US corporate profit margins.
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