By Lucia Mutikani
WASHINGTON (Reuters) -U.S. producer prices increased by the most in five months in November, but easing costs of services such as portfolio management fees and airline fares offered hope that the disinflationary trend remains in place despite stalled progress.
A surge in the price of eggs amid an avian flu outbreak accounted for much of the bigger-than-expected rise in producer inflation last month. Other details of the report from the Labor Department on Thursday were, however, mostly favorable, prompting economists to sharply lower their estimates for the personal consumption expenditures (PCE) price measures tracked by the Federal Reserve for its 2% inflation target.
The report, together with other data showing more people were collecting unemployment checks at the end of November relative to the beginning of the year as demand for labor cools, cemented investor expectations that the U.S. central bank would deliver its third consecutive interest rate cut next week.
Inflation could, however, rise next year should President-elect Donald Trump’s incoming administration push ahead with tariff increases and mass deportations of undocumented immigrants.
“We see little evidence of pipeline price pressure in the producer price data,” said Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics. “The foundations are in place for core PCE inflation to fall further next year, though the new administration will snatch defeat from the jaws of victory if they press ahead with higher import tariffs and deportations.”
The producer price index for final demand jumped 0.4%, the largest gain since June, after an upwardly revised 0.3% increase in October, the Labor Department’s Bureau of Labor Statistics said. Economists polled by Reuters had forecast the PPI gaining 0.2% following a previously reported 0.2% rise in October.
In the 12 months through November, the PPI shot up 3.0%. That was the biggest year-on-year increase since February 2023 and followed a 2.6% rise in October. The government reported on Wednesday that consumer prices increased by the most in seven months in November, while a measure of underlying price pressures continued to run warmer over the past four months.
Wholesale goods prices surged 0.7%, accounting for nearly 60% of the monthly rise in the PPI, after edging up 0.1% in October. Food prices soared 3.1%, making up 80% of the increase in goods prices. Wholesale egg prices vaulted 54.6%, the most since June, after declining 20.6% in October.
Prices for fresh and dry vegetables, fresh fruits and melons also rose. Energy prices gained 0.2%. Excluding the volatile food and energy components, goods prices rose 0.2%, advancing by the same margin for five straight months.
SERVICES PRICES TAMER
Services prices gained 0.2% after climbing 0.3% in October. Portfolio management fees fell 0.6% after surging 3.1% in October. Airline passenger fares decreased 2.1% after increasing 2.6% in the prior month. The cost of hotel and motel rooms dropped 3.1% after rising 2.8% in October.
Prices for physician and hospital outpatient care were unchanged, but the cost of hospital inpatient care rose 0.2%.
Portfolio management fees, healthcare, hotel and motel accommodation and airline fares are among components that go into the calculation of the PCE price index, excluding food and energy. Following the PPI data, economists slashed their estimates for November’s so-called core PCE inflation to 0.11% from as high as 0.3% on Wednesday after the CPI report.
Core PCE inflation is one of the measures tracked by the Fed for monetary policy. It rose 0.3% for a second straight month in October. Core inflation was forecast increasing 2.8% year-on-year in November, matching October’s advance.
“If our forecast proves correct, it would be a relief and leave us less worried about the recent trajectory of inflation,” said Aditya Bhave, a U.S. economist at Bank of America Securities. “That said … progress on inflation has stalled of late, and there are upside risks to inflation on the horizon.”
Stocks on Wall Street were mostly lower. The dollar was steady versus a basket of currencies. U.S. Treasury yields rose.
Financial markets have almost fully priced in a quarter-percentage-point rate cut at the Fed’s Dec. 17-18 policy meeting, according to CME Group’s (NASDAQ:CME) FedWatch Tool.
The Fed kicked off its monetary policy easing cycle in September. Its benchmark overnight interest rate is now in the 4.50%-4.75% range, having been hiked by 5.25 percentage points between March 2022 and July 2023 to tame inflation.
A separate report from the Labor Department showed initial claims for state unemployment benefits increased 17,000 to a seasonally adjusted 242,000 for the week ended Dec. 7.
The jump likely reflected volatility after the Thanksgiving holiday and probably does not mark an abrupt shift in labor market conditions. Claims are likely to remain choppy in the weeks ahead. Nonetheless, the labor market is slowing.
Though job growth accelerated in November after being severely constrained by strikes and hurricanes in October, the unemployment rate ticked up to 4.2% after holding at 4.1% for two consecutive months. A stable labor market is critical to keeping the economic expansion on track.
Historically low layoffs account for much of the labor market stability, and have driven consumer spending.
The number of people receiving benefits after an initial week of aid, a proxy for hiring, increased 15,000 to a seasonally adjusted 1.886 million during the week ending Nov. 30, the claims report showed.
The elevated so-called continued claims are a sign that some laid-off people are experiencing longer bouts of unemployment. Continued claims are still running high in Washington State, despite the end early last month of a strike at Boeing (NYSE:BA) .
They remain lofty in North Carolina in the aftermath of Hurricane Helene and in Michigan following job losses in the automobile sector. The median duration of unemployment spells rose to the highest level in nearly three years in November.
“While the labor market on balance appears healthy, there are some pockets of softness, and the Fed wants to guard against that turning into more significant weakness,” said Nancy Vanden Houten, lead U.S. economist at Oxford Economics.