Wholesale price increases were weaker than expected in December, suggesting pipeline inflationary pressures eased towards the end of the year, but could prompt further Fed rate cuts in the near future. There is a high possibility that it will not be enough.
Tuesday’s Bureau of Labor Statistics report showed the producer price index rose just 0.2% for the month, below the 0.4% rise in November and below the Dow Jones consensus estimate of 0.4%.
The so-called core PPI, which excludes food and energy, was flat compared to the expected 0.3% rise. Excluding food, energy and trade services, the index rose just 0.1%.
On an annual basis, headline PPI rose 3.3% for the year, significantly exceeding the 1.1% rise in 2023.
Commodity prices rose 0.6%, pushed by a 9.7% rise in gasoline prices. Increases in several food and energy-related measures were offset by a 14.7% decline in fresh and dried vegetable prices.
On the service side, prices were flat, although passenger traffic increased by 7.2%, offset by a decline in room rates.
Stock market futures soared on the news, while U.S. Treasury yields fell after spiking in early 2025.
The announcement is the first of two major inflation measures this week that are likely to be reflected in the Federal Reserve’s interest rate decisions in late January.
The BLS is scheduled to release its more closely watched Consumer Price Index measurements on Wednesday. This would result in a 0.3% monthly increase in both the headline and core measures, with annual inflation expected to be 2.9% and 3.3% respectively.
The central bank focuses on the Department of Commerce’s Personal Consumption Expenditure Price Index as its main inflation measure, but measures of PPI and CPI are also factored into its calculations.
Market pricing overwhelmingly suggests that the Fed will leave the Fed unchanged at its January 28-29 meeting. But policymakers, especially Chairman Powell, could lay the foundation for future developments on interest rates.
Federal funds futures pricing on Tuesday suggested only one rate cut this year. Economists at Bank of America said Monday they believe the Fed can do so before the end of the year. At a December meeting, Fed officials determined the amount equivalent to two rate cuts this year, assuming a quarter-point change.
