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Economic Report: U.S. wholesale inflation rises at slowest pace in nine months – but it’s not as good as it looks

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The numbers: Wholesale prices rose in September at the slowest pace in nine months, but they were held down by several unusual factors that are unlikely to last. The report offered little proof the highest bout of U.S. inflation in 30 years is fading fast.

The producer price index climbed 0.5% last month, the government said Thursday. It was the smallest gain since last December and was a touch below expectations. Economists polled by The Wall Street Journal had forecast a 0.6% advance.

The smaller-than-expected increase helped cheer investors and drive big gains in the stock market in Thursday trades.

Yet the details of the report were not as positive. A steep drop in airline fares and an unusual decline in transportation and warehousing costs held down overall producer prices.

What’s more, the cost of more goods and services are rising now compared to three months ago when the increases were concentrated in fewer products such as lumber and used vehicles.

Since January wholesale prices have climbed at least 0.5% in every single month. Before the pandemic they averaged less than a 0.2% increase each month.

“It tells you quite a bit about the inflation picture that a [0.5%] result is considered a relief,” said chief economist Stephen Stanley of Amherst Pierpont Securities. ” Unfortunately, as with yesterday’s CPI report, the details do not offer much comfort.”

Read: Inflation rises at 5.4% yearly pace, CPI shows, and stays at 30-year high

The pace of wholesale inflation over the past 12 months, meanwhile, rose again to 8.6% from 8.3%. That’s the highest level since the index was reconfigured in 2010, and likely one of the highest readings since the early 1980s.

Big picture: The burst of high U.S. inflation is not going to subside very quickly as the Federal Reserve once predicted. Many economists think it could stay above 3% all of next year instead of dropping to around 2% as the Fed expects.

Read: High inflation to last awhile, Fed’s Bostic says, and it’s no longer ‘transitory’

The biggest source of inflation is a shortage of business parts and supplies that are gumming up the entire economy. Rising gasoline prices and labor costs are now adding to the upward pressure on prices.

These problems are expected to persist for months or even longer, raising the odds the U.S. could be facing its biggest period of sustained inflation in decades.

Key details: On the face of it, the smallest increase in wholesale prices since the end of last year would seem to suggest some relief from high inflation is coming. Yet the latest PPI report is sprinkled with oddities.

The wholesale cost of airline fares, for example, was reported to plunge 17% in September. While rising delta cases spurred a decline in travel, it’s unlikely that prices fell so steeply. And prices should rebound soon with delta cases receding.

The cost of transportation and warehousing sank a surprising 4% last month, but it also seems like an anomaly. Ports are backed up, truckers are hard to find, space on rail cars is limited and major shippers such as Fedex
FDX,
+1.33%

and UPS
UPS,
+3.87%

are raising prices.

“As any company will tell you, [that] has no basis in reality,” said chief economist Joshua Shapiro of MFR Inc.

The cost of a broader range of goods and services, what’s more, are rising compared to earlier in the year “The breadth of inflation should be very disturbing to Fed officials,” Stanley said.

In September, higher costs of gasoline and food were among biggest contributors to the increase in wholesale prices.

What’s worse, energy prices are still on the rise and lots of food producers have recently announced price increases.

The cost of services rose just 0.2%, but it’s a volatile category that can swing sharply from month to month.

The core rate of wholesale inflation, meanwhile, rose a scant 0.1% last month to mark the smallest increase in 16 months. And the increase in the core rate over the past 12 months actually felly to 5.9% from 6.3%.

The core rate strips out food, energy and trade margins and is normally a less volatile measure that gives a more accurate picture of inflationary trends. Yet the low reading in September should be treated cautiously, economists say.

One reason: There is still plenty of inflation in the “pipeline” of the economy. The cost of raw and partly finished goods in the earlier stages of production both rose sharply in September.

What they are saying? “There’s no question producers are struggling with supply chain issues and labor shortages, so it’s way too early to call the relatively low increases in core PPI a harbinger of a new trend,” said senior economist Will Compernolle of FHN Financial.

Market reaction: The Dow Jones Industrial Average
DJIA,
+1.46%

and S&P 500
SPX,
+1.55%

rose in Thursday trades.

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