Wholesale prices rose faster than expected last month, dampening hopes the Federal Reserve can afford to slow the pace of interest rate hikes.

The Producer Price Index (PPI) rose 0.3% in November, above estimates of a 0.2% increase, the Bureau of Labor Statistics (BLS) reported on Friday. On an annual basis, prices rose 7.4%, decelerating from 8.1% in October but above forecasts of 7.2%. The core index, which excludes volatile food and energy costs, rose 0.3% from a month earlier, or 4.9% year-over-year.

Key Takeaways

  • Producer prices rose 0.3% in November, matching the pace of October and topping expectations of 0.2%
  • On an annual basis, prices rose 7.4%, decelerating from an 8.1% gain in October but exceeding projections of 7.2%
  • Gains were led by higher services costs, which rose at the fastest pace since August
  • Food prices kept rising, while those for energy, transportation, and warehousing declined
  • Higher wholesale prices could prompt the Federal Reserve to adopt a more hawkish policy stance

Price Gains by Category

Services costs rose 0.4% last month, at the fastest pace since August. A third of the increase came from an 11.3% spike in costs for securities brokerages, dealing, investment advice, and related services. Trade services costs rose 0.7%, rebounding from declines in September and October, and rising at the fastest pace since August.

Prices for final demand goods rose just 0.1%, the smallest monthly gain since a decline in August. Within that category, food prices led gains, rising 3.3% amid a 38.1% jump in the cost of fresh and dry vegetables. Energy prices fell 3.3% as the price of crude oil and gasoline declined throughout the month. Prices for transportation and warehousing fell 0.9% compared to October, in the biggest monthly decline since August.

Explaining the Producer Price Index (PPI)

The Producer Price Index (PPI) captures inflation at the wholesale level, from the perspective of goods-producing firms and product manufacturers. Because rising producer costs often flow to consumers in the form of markups, the index is considered to be a leading indicator for the Consumer Price Index (CPI), which measures inflation from the consumer’s perspective. A hotter-than-expected PPI inflation reading could translate into a slower pullback in consumer inflation.

Implications for Fed Policy

The November PPI report suggests the Fed has more work to do before it can claim victory in its battle to tame inflation. U.S. stocks fell and bond yields rose following the announcement, as traders factored in a more hawkish Fed policy stance.

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