U.S. PPI year-on-year exceeds expectations, PCE favored by the Federal Reserve faces pressure!

The data released by the U.S. Bureau of Labor Statistics on Thursday showed that the Producer Price Index (PPI) month-on-month recorded 0.2%, in line with expectations of 0.2%, with the previous value revised from 0% to 0.1%; the PPI year-on-year recorded 2.4%, higher than the expected 2.3%, with the previous value revised from 1.8% to 1.9%.

Excluding the volatile food and energy categories, the producer price index month-on-month and year-on-year were 0.3% and 3.1%, respectively.

The PPI report indicated that service costs rose by 0.3% after increasing by 0.2% last month. Prices of goods excluding food and energy also slightly increased by 0.3% compared to last month.

For the week ending November 9, the number of initial unemployment claims recorded 217,000, lower than the expected 223,000 and below the previous value of 221,000. Applications for unemployment benefits in the U.S. fell to the lowest level since May, indicating that demand for workers remains strong despite recent storms and strikes.

According to data released by the Labor Department on Thursday, the four-week moving average of initial claims (which helps to smooth out volatility) fell to 221,000, the lowest number since May.

After the data was released, the U.S. dollar index showed little volatility.

Since peaking in mid-2022, U.S. inflation has more or less steadily declined. However, average prices are still nearly 20% higher than three years ago, which has been a source of public anger, leading to Trump's victory over Harris in last week's presidential election and returning control of the Senate to the Republicans.

Although price pressures have significantly eased this year, the recent lack of progress suggests that Federal Reserve policymakers will slow the pace of interest rate cuts.

The day before the release of the October producer price report, the Labor Department reported that consumer prices rose 2.6% year-on-year last month, indicating that inflation at the consumer level may be stabilizing after slowing to its lowest level since 2021 in September. However, most economists say they believe inflation will ultimately resume its slowdown.

Inflation has been moving toward the Federal Reserve's year-on-year target of 2%, and the Fed's inflation fighters are sufficiently satisfied with this improvement, having cut the benchmark interest rate twice since September.

The producer price index released on Thursday provides an initial insight into the direction of consumer inflation. Economists also pay attention to it because some of its components, particularly healthcare and financial services, partially constitute the Fed's preferred inflation measure—the Personal Consumption Expenditures (PCE) Index.

Trump's election victory has raised doubts about the future trajectory of inflation and whether the Federal Reserve will continue to cut interest rates. In September, the Fed nearly declared victory over inflation and significantly lowered the benchmark interest rate by 50 basis points, marking the first rate cut since the pandemic severely impacted the economy in March 2020 Last week, the Federal Reserve announced its second rate cut, which is a more typical reduction of 25 basis points.

Despite Trump's vow to lower inflation, partly by encouraging oil and gas drilling, some of his other campaign promises—imposing hefty tariffs on imported goods and deporting millions of immigrants working illegally in the U.S.—are seen by mainstream economists as a trigger for a resurgence of inflation. Nevertheless, according to the CME Group's FedWatch Tool, Wall Street traders expect an 82% chance of a third rate cut at the Fed's next meeting in December.

In 2021, as the economy rapidly emerged from recession, inflation began to soar, leading to severe shortages of goods and labor. The Federal Reserve raised the benchmark interest rate 11 times in 2022 and 2023 to the highest level in 23 years. The resulting significant increase in borrowing costs is expected to push the U.S. into recession, but this potential recession has not yet occurred. The economy continues to grow, and employers are hiring continuously. Moreover, inflation has largely been slowing down