Wholesale price growth cooled off significantly in December, the Bureau of Labor Statistics reported Wednesday, indicating that the Federal Reserve’s aggressive interest rate hikes may finally be bringing price pressures under control.
The Producer Price Index — a key inflation metric that measures prices paid for goods and services by businesses before they reach consumers — rose 6.2% in December compared to a year earlier. That’s way down from the revised 7.3% gain reported for November.
The latest reading was much lower than Wall Street’s expectations: Economists surveyed by Refinitiv had forecast a 6.8% annual increase.
The slower pace of increase marks the ninth straight time that the 12-month reading has fallen from its peak of 11.7% in March. It’s also the slowest annual increase since March 2021.
Producer prices fell 0.5% compared to November, the biggest one-month drop since April 2020, when lockdowns in the early days of the pandemic crashed demand for goods. It’s also the first monthly decline since last August.
Energy and food
Much of the decline was driven by falling energy prices, which saw a one-month drop of 7.9%, following a revised 3.2% decline in November. Wholesale energy prices have now fallen in four of the last six months since reaching their peak in June, dropping more than 21% in the months since then.
Food prices fell 1.2% in December compared to a month earlier, slowing their growth to 14.3% over the course of the last year — down from 15.4% in November.
That’s the first monthly decline in food prices since a modest 0.1% decline in August, as well the biggest monthly decline in two years.
Excluding the often-volatile prices for food and energy, core PPI rose 5.5% over the year ending in December, and 0.1% compared to November. Those were both slower increases than those in the prior month.
This is all good news for the Fed, which at its most recent rate-setting meeting reported seeing signs of slowing inflation. The central bank said it would begin to slow the pace of interest rate increases, starting with a half-point rise in December, instead of the three-quarter-point hikes it has rolled out at its previous four policymaking meetings.
Consumer prices
PPI is not the only sign of slowing inflation.
The Consumer Price Index — the government’s key measure of prices paid by Americans for goods and services — also showed a slower 12-month rise in the December reading and a drop in prices compared to November.
And the Personal Consumption Expenditures price index (PCE), the Fed’s preferred inflation pressure, also showed slowing price pressures for its most recent reading in November.
But given how much of the recent slowing in inflation is driven by lower energy prices, it’s not clear how long this good news on inflation will last.
Energy prices are primarily driven by prices on global commodity markets, and they have been affected by issues such as a surge in Covid cases in China, which caused a drop in demand. Energy prices are also being pushed down due to worries about the risk of recession in several major economies around the world, since recessions reduce the demand for energy.
But some forecasts of a reduced risk of recession and improved outlook for Covid in China could start to lift demand for energy once again and lead prices higher.
