Inflation unexpectedly accelerated! The month-on-month growth rate of the U.S. PPI in November recorded the largest increase since June

In November, the U.S. PPI wholesale inflation unexpectedly accelerated, with a significant rise in egg prices overshadowing more moderate cost increases in other areas. The relatively mild increases in other categories suggest that the price index favored by the Federal Reserve will also show moderate growth.

On Thursday, December 12, the U.S. Bureau of Labor Statistics released data showing:

• November PPI rose 3% year-on-year, the largest increase since February 2023, expected 2.6%, previous value 2.6%.
• Core PPI, excluding food and energy, rose 3.4% year-on-year, expected 3.2%, previous value 3.1%.

• PPI rose 0.4% month-on-month, the largest increase since June this year, expected 0.2%, previous value revised from 0.2% to 0.3%.
• Core PPI, excluding food and energy, rose 0.2% month-on-month, in line with expectations, previous value 0.3%.

PPI Sub-item Data

The data shows that commodity prices increased by 0.7%, marking the largest increase since February this year. Food prices contributed over 80% of the increase, with food prices rising 3.1%. Egg prices soared by 55% within a month, primarily reflecting the impact of avian influenza. Additionally, prices for dried vegetables, fresh fruits, and poultry also rose across the board.

Overall service costs rose slightly by 0.2%, the lowest level in the past four months. Among them, trade grew by 0.8%, driving up service costs.

Excluding volatile items such as food and energy, the increase in commodity prices was similar to that in the service sector.

In the healthcare category, prices for hospitals, physician services, nursing home services, and home healthcare remained almost unchanged, which suppressed the overall inflation trend.

Additionally, portfolio management services (typically tracking stock market trends, recording fees paid to investment advisors) and airfare prices also declined, which somewhat alleviated overall inflationary pressures.

Wall Street Interpretation

Regarding inflation, the messages conveyed are mixed. On one hand, as doubts about the progress of cooling inflation continue to rise, the November PPI increase exceeded expectations. On the other hand, the details of the latest PPI data show that prices in several key service categories remained almost unchanged or directly declined, leading economists to believe this alleviates some concerns about the recent strengthening of overall inflation indicators Although PPI data is not as closely watched as CPI, economists still pay close attention to this report because it partially reflects the Federal Reserve's preferred inflation indicator—the Personal Consumption Expenditures Price Index (PCE). In November, healthcare categories related to PCE, such as hospital services, physician services, nursing home services, and home healthcare, showed little change. The decline in portfolio management and airfare prices also suggests that PCE inflation will not be too hot.

Although the PCE data will not be released before the Federal Reserve's meeting next week, officials will have a rough understanding of the PCE data based on the CPI and PPI reports. Economists at Bank of America recently projected that PCE will rise by 0.1%, which would be the smallest increase in six months:

If our prediction proves correct, it would be a relief, alleviating concerns about recent inflation trends. This also strengthens our confidence in the Federal Reserve's rate cut next week. That said, the outlook thereafter remains unclear. Recent inflation progress has stalled, and upside risks to inflation are emerging.

On Wednesday, CPI data showed that core inflation in the U.S. remained strong for the fourth consecutive month. However, economists generally believe that this week's CPI and PPI inflation data are fundamentally benign, still pointing to sufficient cooling of inflation, ultimately bringing the Federal Reserve back to its 2% inflation target.

The November PPI data and the number of initial jobless claims released on the same day are the last key data points before the Federal Reserve's FOMC meeting next week. Next week, the Federal Reserve will announce its December interest rate decision, which is widely expected to involve a 25 basis point cut.

However, after three consecutive rate cuts by the Federal Reserve in 2024, the pace of future rate cuts is expected to slow. After a slowdown earlier this year, a series of inflation data in recent months has shown stickiness. Looking ahead, uncertainty in the market regarding future price and interest rate trends is increasing, especially with the potential tariff policies of the Trump administration.

Market Reaction

After the release of PPI and initial claims data on Thursday, U.S. stocks slightly declined in pre-market trading.

Futures market traders are almost certain that the Federal Reserve will cut rates by 25 basis points next week