UPDATE: U.S. producer prices surge 0.4% in October

11/14/17 09:23 AM EST

By Greg Robb, MarketWatch

Gain in wholesale prices well above expected 0.1% rise

The numbers: The producer price index rose 0.4% in October, the Labor Department reported Tuesday (https://www.bls.gov/news.release/ppi.nr0.htm). That was well above the MarketWatch forecast of a 0.1% gain.

Another measure preferred by economists, known as core PPI, rose 0.2% for the third straight month. The core rate strips out food, energy and trade margins.

The increase in the PPI pushed the 12-month rate of wholesale inflation up to 2.8%, the highest since February 2012.

The 12-month rate of core PPI advanced 2.3% in October, the highest since the series began in August 2014.

What happened: The gain in wholesale prices was widespread and came despite soft energy prices. The price of goods rose 0.3% in October, led by pharmaceutical preparations, which increased 2.1%.

The index for final demand of services rose 0.5%, the biggest gain since April. Trade services jumped 1.1%, the biggest gain since January. Food prices rose 0.5% in October, the biggest gain since June. Energy prices were flat after steep 3.4% gain in September tied to the hurricanes. Gasoline prices fell 4.6%.

The big picture: The PPI does show that inflation is building in the "pipeline" of the economy. Economists caution that it could take a while for wholesale prices to be passed along to consumers. But the firm wholesale prices in October will bolster arguments of Federal Reserve officials who believe that soft consumer inflation seen this year is due to temporary factors. These officials are likely to press for the central bank to raise short-term interest rates gain in December.

What they are saying: A stronger dollar and better global growth could cause the core PPI to drift higher in coming months, said Josh Shapiro, chief U.S. economist at MFR Inc. But he added he did not believe the gains at the producer level will make a "material difference" to consumer price inflation. "Rather, whether the core CPI begins to accelerate modestly will be mainly dependent on core service prices, which in turn will be most affected by labor costs and the pace of the heavily-weighted homeowners equivalent rent component," Shapiro said.

Market reaction: Not much initially. Stocks were set to open lower. A earlier decline in Treasurys reversed slightly.

-Greg Robb; 415-439-6400; AskNewswires@dowjones.com

 

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11-14-17 0923ET

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