U.S. producer prices were unexpectedly unchanged in November amid cheaper energy goods, and underlying inflation pressures at the factory gate were muted.
The report from the Labor Department on Wednesday, which also showed services prices flat for a second straight month, strengthened optimism that overall inflation would continue to subside and allow the Federal Reserve to start cutting interest rates next year.
The U.S. central bank held rates steady on Wednesday and signaled in new economic projections that the historic tightening of monetary policy engineered over the last two years is at an end and lower borrowing costs are coming in 2024.
Since March 2022, the Fed has raised its policy rate by 525 basis points to the current 5.25%-5.50% range.
"The good news today is that there are minimal price increases at the lower stages of factory production," said Christopher Rupkey, chief economist at FWDBONDS in New York. "This makes it even more likely they (Fed officials) will bring inflation down for a 'soft-landing' without bringing the economy to its knees."
The unchanged reading in the producer price index for final demand in November reported by the Labor Department's Bureau of Labor Statistics followed a revised 0.4% drop in October.
Economists polled by Reuters had forecast the PPI gaining 0.1% last month. Goods prices were unchanged in November as a 1.2% decline in the cost of energy products was offset by a 0.6% rebound in food prices. Goods prices dropped 1.4% in October.
Food prices, which had dipped 0.1% in October, were last month boosted by a 58.8% surge in wholesale prices of eggs. Cases of avian flu on commercial farms are on the rise, hitting large egg-laying operations in states like Kansas and Ohio.
Prices for fresh fruits and melons also rose.
Energy costs were pulled down by a 4.1% decline in gasoline prices, as well as cheaper jet fuel and liquefied petroleum gas. Energy prices fell 6.7% in October.
In the 12 months through November, the PPI rose 0.9% after advancing 1.2% in October. Data on Tuesday showed consumer prices edged up in November amid stubbornly high rental costs.
Stocks on Wall Street were trading. The dollar was steady against a basket of currencies. U.S. Treasury prices rose.
SERVICES INFLATION PROGRESS
Though inflation remains above the Fed's 2% target, price increases are less broad-based.
Financial markets are leaning towards a rate cut in May, according to CME Group's FedWatch Tool.
Excluding the volatile food and energy components, goods prices rose 0.2%. The so-called core producer goods prices were unchanged in October.
This raises the risk that goods deflation, evident in the consumer price data, could be close to running its course.
But most economists were not too concerned with the modest rebound in core producer goods prices, saying the focus should be on the trend, with price increases having not exceeded 0.2% since February.
The cost of services was unchanged in November as it was in October. Services have been the main driver of inflation amid strong consumer spending supported by a resilient labor market. Transportation and warehousing services cost less last month.
Wholesale prices for hotel and motel rooms, however, rose 4.0%. There were also increases in the costs of deposit services and healthcare. But portfolio management fees, furniture retailing and the cost of transporting freight by road fell.
"While consumer spending is still fueling inflation even in service categories such as leisure and hospitality industries, the downward trend among service providers' own costs suggests that if consumer demand cools, consumer price inflation should also then have a path to stability," said Kurt Rankin, senior economist at PNC Financial in Pittsburgh, Pennsylvania.
Portfolio management fees, hotel and motel accommodation are components in the calculation of the personal consumption expenditures price indexes, the inflation measures tracked by the Fed for its inflation target.
With the CPI and PPI data in hand, most economists expected the core PCE price index to be unchanged, with the risk of rounding up to a 0.1% gain in November, slowing from October's 0.2% rise. That would lower the year-on-year increase in the core PCE price index to 3.2% in November, which would be the smallest gain since April 2021, from 3.5% in October.
The narrower measure of PPI, which strips out food, energy and trade services components, edged up 0.1% after rising by the same margin in October. The core PPI increased 2.5% on a year-on-year basis, the smallest gain since February 2021, after rising 2.8% in October.
"This report provides another small piece of good news at the margin in the Fed's quest to return inflation to 2%," said Conrad DeQuadros, senior economic advisor at Brean Capital in New York.
