Egg prices soar! The U.S. November PPI records the largest increase since the beginning of 2023

According to the Zhitong Finance APP, following the CPI released on Wednesday indicating persistent inflation, the PPI released on Thursday continued to reinforce this unfavorable trend of inflation persistence for the U.S. economy. In November, the unexpected surge in egg prices overshadowed relatively mild price trends in other areas, leading to an unexpected acceleration in the U.S. PPI on both a month-on-month and year-on-year basis.

Some core data in the PPI indicates that the inflation index favored by the Federal Reserve—the core PCE—may show a significant cooling compared to the CPI and PPI. The November core PCE data may reflect the moderate cooling that the Federal Reserve hopes to see, primarily due to slight declines in portfolio management fees included in the PCE index and air ticket prices. After the PPI data was released, the probability of a Federal Reserve rate cut in December remained close to 100%, while expectations for rate cuts in 2025 showed a significant cooling.

According to a report released by the U.S. Bureau of Labor Statistics on Thursday, the Producer Price Index (PPI), which measures final demand, rose 0.4% month-on-month, marking the largest increase since June, compared to market expectations of a 0.2% increase. Year-on-year, the PPI surged 3%, the largest increase since March 2023, exceeding the market expectation of 2.6%. Food costs were a comprehensive driver behind the PPI's largest increase in five months in November.

Meanwhile, the core PPI, excluding food and energy, rose 0.2% this month and increased 3.4% compared to the same period last year, both slightly exceeding market expectations, with the year-on-year core PPI recording the largest increase since early 2023.

U.S. Wholesale Inflation Accelerates—Surge in Egg Prices Offsets Mild Growth in Services

The U.S. wholesale inflation data closely follows the highly watched Consumer Price Index (CPI), which showed on Wednesday that core inflation has remained robust for four consecutive months. After a rapid slowdown at the beginning of 2024, a series of inflation figures have become more heated, especially with the incoming Trump administration threatening to impose higher tariffs on imported goods, increasing uncertainty regarding U.S. prices and the trajectory of benchmark interest rates. Most economists expect that Trump's tariff increases combined with domestic tax cuts could significantly boost inflation, potentially leading the Federal Reserve to choose not to cut rates at all throughout 2025.

Economists are closely monitoring the PPI report, as several key components are included in the Federal Reserve's preferred inflation measure—the core Personal Consumption Expenditures Price Index (core PCE). The good news is that these components are favorable for the Federal Reserve's rate cut expectations, as healthcare categories such as hospital services, physician services, nursing home services, and home healthcare showed almost no change, remaining essentially flat. Another key component of the core PCE—portfolio management services, which covers fees paid to investment advisors and typically tracks stock market trends—along with another key component of the PCE, air ticket prices, also showed declines This is also why, under the release of the PPI that reveals persistent inflation, the expectation for the Federal Reserve to cut interest rates in December has not changed significantly. The CME "FedWatch Tool" shows that the probability of a 25 basis point rate cut by the Federal Reserve in December is close to 100%. However, after the PPI data, which exceeded expectations and reached a new high since 2023, interest rate futures traders have cooled their expectations for rate cuts in 2025, from betting on 3-4 cuts before the PPI release to betting on 2 cuts, which implies a total rate cut of 50 basis points in 2025.

Although core PCE data will not be released before next week's Federal Reserve policy meeting, Federal Reserve officials and economists will have a rough outline of the core PCE data based on the CPI and PPI reports. Interest rate futures traders generally expect the Federal Reserve to lower the benchmark interest rate by 25 basis points next week, although forecasters widely believe that after three consecutive meetings of rate cuts, the pace of cuts will slow significantly next year.

Another piece of data shows that the number of initial jobless claims rose to a two-month high last week. The number of continuing claims, which is an indicator of the number of people receiving welfare benefits, increased during the Thanksgiving holiday week.

The November Producer Price Index (PPI) data showed that commodity prices unexpectedly rose by 0.7% month-on-month, marking the largest increase since February. The U.S. Bureau of Labor Statistics stated that over 80% of the PPI growth can be attributed to food price inflation. Egg prices surged by 55% compared to a month ago, largely reflecting the impact of avian influenza.

The overall service costs in the PPI report rose slightly by 0.2% in November, the lowest increase in four months, which is good news for the Federal Reserve's anti-inflation efforts. Excluding food and energy, core commodity prices in the U.S. also saw a similar slight increase in November