Wholesale inflation fell 0.1% in December, capping a year in which the rate of price increases fell sharply, according to a Labor Department report released Friday.
The producer price index for the whole of 2023 stood at 1%, compared to 6.4% in 2022. More than half of the December drop, or 60%, comes from the lower energy costs. Food costs fell by 0.9% over the month. Economists forecast an overall rise of 1.3% for the year.
“The PPI is a little lower than expected. No indication of inflation at the wholesale level,” Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research, posted on social media.
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The report follows Thursday’s warmer-than-expected release of the consumer price index for December, showing inflation rose to an annual rate of 3.4% from 3.1% in November . Much of the increase is attributed to housing costs, although government action on this tends to lag market data that shows rents stabilizing.
Although producer prices – those paid by businesses for the goods they need to provide products and services – are less often followed by consumers, they often indicate where inflation is heading.
Overall, both reports show that the inflation trend is moderating and will not change expectations that the Federal Reserve will be done with raising interest rates and may well cut them later this year.
“Producer prices fell in December for the third straight month, indicating that inflation is easing and consumer prices will slowly reach the Fed’s 2% target,” said Jeffrey Roach, chief economist at LPL Financial.
BCA Research said in a client note Friday morning that “leading indicators for used carport and vehicle prices indicate there is potential for them to decline significantly in the future.”
“At the same time, various measures of underlying inflation remained broadly stable,” the company added. “Core inflation remained largely unchanged at 0.3% month-on-month and fell slightly on a 12-month rate of change basis, from 4.0% year-on-year at 3.9% over one year.”
The Fed kept rates unchanged at its last meeting in December while adjusting its member consensus forecast to allow for possible three rate cuts this year. These would most likely be reductions of a quarter point, or a total of 0.75% from the current level of 5.25% to 5.5%. Some economists estimate they could cut their budget by a total of 1% in 2024.
Much will depend on how the economy performs this year, after posting strong performance in 2023. The labor market remains strong, although closer to a more normal pace of job growth than in 2022 and at first half of 2023. are increasing and now exceed the level of inflation, which supports consumer spending.
At the same time, geopolitical events are causing concern. Attacks on shipping in the Red Sea by Iran-backed Houthi rebels are raising shipping costs and threatening to disrupt key products like oil and cargoes from Asia. That triggered a series of air and missile strikes by the United States, the United Kingdom and other countries overnight Thursday.
At the same time, dysfunction within Congress has raised alarms about a possible government shutdown as early as next week. The year will also be marked by a series of important elections around the world, notably in the United States, which some analysts say could disrupt global trade and power relations.
“When the whole world goes off-script, you end up with these very volatile inflection points, and all of a sudden forecasting becomes a lot more difficult,” says Jared Cohen, president of global business at Goldman Sachs, who joined Ian Bremmer, chairman of Goldman Sachs. and founder of Eurasia Group and GZERO Media, on the Goldman Sachs Exchanges podcast published Friday. “And the volatility and uncertainty around geopolitics ends up impacting businesses more than at any other time in history.”
Those arguments were echoed Friday morning by Jamie Dimon, CEO of JPMorgan Chase and one of America’s top business leaders, when America’s largest bank released its results.
Despite his bank’s performance, Dimon took a cautious stance toward the U.S. economy.
“The U.S. economy continues to be resilient, consumers continue to spend, and markets currently expect a soft landing,” Dimon said in the earnings release.
But the US government is spending more than it receives and changes in global supply chains after the Covid-19 crisis raise the possibility that inflation will remain higher than markets anticipate, a he declared. Dimon also said wars in Ukraine and the Middle East were factors that could upend the positive narrative.
“These significant and somewhat unprecedented forces cause us to remain cautious,” he said.