US DATA
October's producer price report was slightly hotter than expected, but the longer-term signal depends on one's perspective. Core PPI momentum is slowing and there is little in the report to deter the Fed from cutting rates again in December, but overall pipeline price inflation appears to be stalling at an uncomfortably high level.
- Final demand PPI picked up slightly in October 0.2% M/M from 0.1% prior, with ex-food and energy up to 0.3% from 0.2%. The headline figure was in-line but on the "hot" side due to a 0.1pp upward revision to September, while ex-food/energy was 0.1pp above expected. The standout aggregate result though was an acceleration in core (ex-food/energy/trade services) to 0.3%, a 3-month high, from 0.1% prior.
- The rise in core was a little above expected (0.2% survey), and leaves the Y/Y rate at 3.5% - a continuation of the steady re-acceleration from 2023 lows of 2.5%.
- Notably final demand goods inflation rose for the first time in 3 months (0.1%), boosted by food prices - though even ex-food/energy, the 0.3% M/M growth was the highest since April. And as we'd noted in our CPI preview, core goods are likely to become an increasingly prevalent issue for the 2025-26 inflation outlook should a broad increase in tariffs materialize as expected: the trend direction of core PPI inflation tracks core import prices, in which disinflation has been reversing since early 2024.
- The positive news from a disinflationary perspective is that this is well below the 7+% rates of late 2021 and early 2022. And despite the M/M and Y/Y pickup, core momentum is slowing overall: the 3-month average of the annualized monthly rate of core PPI fell to 2.5% from 2.9%, with the 6-month rate at 2.9% (from 3.3% prior), both 10-month lows.
- Additionally, some of the "heat" came from the volatile portfolio management category which contributed over one-third of the rise in final demand services inflation.
- As we highlighted earlier, some of the key PPI categories that feed into PCE including passenger airfares and portfolio management, were higher than what we think most analysts had been assuming - potentially tipping the balance of the October core PCE estimate toward an unrounded 0.3% M/M vs 0.2% (most forecasts had been clustered between 0.21-0.25% post-CPI).
- So there is nothing here that will give the Fed reason to avoid a December pause, even if it could make that decision a little closer. But the broader picture is that progress in pipeline price disinflation has been limited, and not particularly adding to confidence that PCE is headed sustainably back to 2%.
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