Wholesale inflation heated up again last month, reversing recent progress

(CNN) — US wholesale inflation picked up more than expected in October, indicating that some price pressures persist at the producer level.

The Producer Price Index, a measurement of average price changes seen by producers and manufacturers, rose 0.2% on a monthly basis and 2.4% for the 12 months ended in October, marking an acceleration from September, when prices ticked up 0.1% for the month and grew 1.9% annually, according to Bureau of Labor Statistics data released Thursday.

Economists were expecting prices to increase, in large part due to comparisons to this time last year (base effects), when wholesale inflation slowed sharply and even registered outright price declines.

Additionally, the overall index wasn’t benefited as much by falling energy prices, which dropped off by just 0.3% in October versus 2.8% in September.

Still, one potential favorable sign for inflation-weary consumers: Wholesale food prices dropped 0.2% for the month. In September, they shot up by 1%, the largest monthly gain since February.

FactSet consensus forecasts called for a 0.2% monthly gain and for the annual rate to heat up to 2.3%.

Excluding food and energy prices, which tend to be volatile, core PPI rose 0.3% on a monthly basis, marking an acceleration from 0.2% in September. Annually, core PPI heated up from 2.9% to 3.1%, the largest increase since June. Economists projected a 0.2% monthly gain and a 3% annual rate.

PPI captures average price shifts before they reach consumers and serves as a potential bellwether for retail-level inflation in the months ahead.

‘Vigilant for bumps ahead’

Working against the relatively tame food and energy price shifts was a sharp surge in transportation costs. That increase is expected to be a temporary blip as it likely was attributed to elevated demand from hurricane-affected families, noted Eugenio Aleman, Raymond James’ chief economist.

Still, the hotter than expected PPI had some economists already bumping up their estimates for October’s Personal Consumption Expenditures price index, which is the inflation gauge preferred by the Federal Reserve.

That was the case for Thomas Simons, senior vice president and US economist at Jefferies, who raised his forecast and now expects both the overall and core PCE indexes to increase by 0.3% from September.

“Base effects are going to work against the disinflationary trend for the next few months, so the [month over month] prints will be more influential in driving the outlook for inflation,” Simons wrote in an email Thursday.

Thursday’s PPI trajectory mirrored that seen in the latest Consumer Price Index data released Wednesday. CPI jumped to 2.6% for the 12 months ended in October, the first increase in the annual rate since March.

“A rise in the headline and core PPI indices won’t dampen percolating fears of a higher inflation environment after Wednesday’s CPI report,” Oren Klachkin, Nationwide financial markets economist, wrote in commentary issued Thursday. “And yet, while they highlight upside risks to our inflation call, the latest data don’t completely disrupt the disinflation narrative. We’re vigilant for bumps ahead.”

Costs in ‘turning the clocks back’

While base effects factored in heavily to both the PPI and CPI data, the latest readings underscore Federal Reserve officials’ expectations that taming inflation would be an arduous process with plenty of bumps along the way.

Despite those bumps, the overall trend has been one of deflation, where prices aren’t rising as fast as they once did.

However, near-term price stabilization is far from a sure thing.

Major potential risks are waiting in the wings: specifically, from the ongoing conflict in the Middle East as well as president-elect Donald Trump’s proposals for severe tariffs and mass deportations, which economists have warned would be inflationary.

“There could be a cost in turning the clocks back and attempting to make America great again,” said Christopher Rupkey, economist at FwdBonds, in a note Thursday. “It took over two decades for US companies to send production overseas to lower costs, and trying to reverse the trend in a couple of years sounds like a nightmare that could slow US economic growth, if not world growth, sharply.”

As such, goods prices will remain in focus in the year ahead as tariffs could push factory costs higher, Rupkey said.

“It takes just a stroke of the pen to raise tariffs on imported goods, but it could be years to build new factories, especially as many communities don’t want them built in their backyards,” he added. “The other question is where will the factory workers come from with the native-born US population in decline, and most of the current jobs being filled by immigrants?”

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