Producer Price Index Moves From Inflation Back to Deflation

Jon C. Ogg

Not that long ago, the Federal Reserve and the financial markets were worried about endless inflation ahead. Zoom forward into 2019, with lower oil prices and the Fed admitting it needed to slow down its rate hikes, and all of a sudden those inflation fears have dwindled. The Department of Labor reported that the U.S. Producer Price Index (PPI) for final demand fell to −0.2% on a seasonally adjusted basis in December.

Dow Jones had called for PPI to come in flat at 0.0% for December’s headline reading. Final demand prices were up just 0.1% in November but were up 0.6% in October.

For annual producer inflation, PPI for final demand rose by 2.5% for all of 2018. That matched the gain in 2017. This is also at the top of the Fed’s light target range of 2.0% to 2.5% inflation. As a reminder, producer prices generally tend to rise more than consumer prices as there is a delay that prices can be passed down to the public and as competition may keep prices from escalating as fast.

In December’s drop, the Labor Department specified that 80% of the monthly drop in the final demand index was attributable to a 0.4% decline in the prices for final demand goods. The index for final demand services was down just 0.1%, and the core index reading for final demand excluding foods, energy and trade services was unchanged. Dow Jones’ polled economists had called for a 0.2% consensus rise in that core reading for December.

That core reading had posted a 0.3% rise in November. In 2018, prices for final demand sans foods, energy and trade services rose by 2.8%, versus a gain of 2.3% in 2017.

As with energy prices, so goes inflation. The December decrease in the index for final demand goods came as gasoline prices dropped by a sharp 13.1%. The 0.1% drop in prices for final demand services in December was after the index had risen for three straight months.

The Labor Department also broke out several other lines for products and services, as follows:

  • The indexes for diesel fuel, basic organic chemicals, jet fuel, residual fuels and beef also moved down.
  • Prices for fresh fruits and melons rose by 48.9%.
  • The indexes for construction machinery and equipment and for residential natural gas also increased.
  • The decline in prices for final demand services was led by a 0.3% drop in the index for final demand trade services.
  • Prices for final demand transportation and warehousing services fell by 0.2%.
  • The index for final demand services less trade, transportation and warehousing was up by 0.1%.
  • There were slight decreases in the indexes for cellular phone and other wireless telecommunication services, as well as automotive fuels and lubricants retailing, residential real estate loans and airline passenger services.
  • Prices for guestroom rental rose by 2.9%.
  • There were gains in the indexes for inpatient care, machinery and equipment parts, supplies wholesaling and long-distance motor carrying.

The long and short of the matter is that the Federal Reserve now has inflation in check, and that sharp rise in oil in the first part of 2018 saw those gains wiped out heading into the end of 2018.