Further Data Suggests Easing U.S. Inflation, Increasing Chance Fed Softens Hikes

The Producer Price Index (PPI) for October 2022 offered more signals that U.S. inflation is coming down. This builds on a positive Consumer Price Index (CPI) report earlier in the month and is likely to support the view that the U.S. Federal Reserve (Fed) will hike rates less aggressively over the coming months.

October PPI

Producer prices rose 0.2% month-on-month in October. Prices for goods rose, but prices for services fell. PPI inflation is still running at a high rate of 8% year-on-year, but much of that is from high readings earlier in the 12-month window and since July PPI has been more subdued. 0.2% month-on-month inflation translates to 2.4% annual inflation, which is slightly above the Fed’s goal.

Prices for various foods including poultry and hogs declined for the month, in a further signal that food price inflation may be easing. Various commodities fell in price including metals, lubricants and various energy costs. However, gasoline and diesel rose in price for the month.

A softer reading for producer prices is potentially encouraging for consumer inflation because certain producer prices can be a leading indicator of the consumer prices that we may see in the coming months.

Fed Reaction

After the encourage CPI report also this November, Fed policy-makers quickly made speeches emphasizing that it was too early to say the inflation battle was won. November’s PPI report offers more evidence that inflation is trending down from peak levels earlier in 2022. However, the Fed argues that inflation is still well above their goal.

Still, despite the Fed’s position, futures markets are implying that the Fed will not raise rates has high as recently feared. It now looks likely the Fed will raise rates 0.5 percentage points at their December meeting, that’s a large move, but less than previously feared. Also, in broad terms rates are expected to peak at, or slightly below, 5% in 2023. Previously rates edging closer to 6% was viewed as likely.

We’re seen encouraging signs from inflation data. The Fed isn’t anywhere near ready to declare victory yet. Still, interest rate futures suggest that they are likely to be a little less aggressive with coming rate hikes and a pause in rates in 2023 may come a little earlier.