November brought an unexpected rise in wholesale prices, casting doubt on the pace of inflation’s decline, according to data released Thursday by the Bureau of Labor Statistics (BLS). The producer price index (PPI), a key measure of what manufacturers charge for goods and services, rose 0.4% on the month, beating the Dow Jones estimate of 0.2%. On a year-over-year basis, PPI rose 3%, the biggest annual gain since February 2023.
Excluding food and energy price volatility, core PPI increased 0.2%, in line with market expectations. Furthermore, excluding commercial services, the monthly PPI increase fell to just 0.1%. However, the core index’s 3.5% annual rise further highlighted inflationary pressures, marking the highest level since early 2023.
While inflation data continues to show mixed signals, labor market developments have added a further layer of complexity to the economic picture. The Department of Labor reported that initial jobless claims for unemployment benefits reached 242,000 in the week ending Dec. 7, significantly exceeding the forecast of 220,000. That marked an increase of 17,000 claims from the previous week, raising concerns about a potential weakening of the job market.
The stubborn trajectory of inflation
The BLS report indicates that prices for late-demand goods rose 0.7% in November, the steepest increase since February. Notably, 80% of this increase resulted from a 3.1% increase in food prices. Within the food category, egg prices skyrocketed 54.6%, reflecting broader increases in the prices of items such as dried vegetables, fresh fruit and poultry. On the retail side, egg prices rose 8.2% in November alone and were up an astonishing 37.5% from a year earlier, as detailed in a separate index report consumer price data (CPI) released on Wednesday.
Service costs also rose 0.2% in November, driven largely by a 0.8% increase in commercial services. These numbers highlight ongoing price pressures across key sectors of the economy, suggesting that inflation remains a challenge despite some areas of moderation.
The PPI data came on the heels of the CPI report, which showed a monthly increase in consumer prices of 0.3% and a 2.7% increase from last year. Together, these reports reflect persistent inflationary trends that could complicate efforts to reach the Federal Reserve’s 2% inflation target.
Expectations of a rate cut by the Federal Reserve persist
Despite the inflationary backdrop, financial markets are widely anticipating a reduction in the Federal Reserve’s benchmark interest rate during its next policy meeting. Futures markets suggest an almost certain probability of a 0.25 percentage point cut when the Federal Open Market Committee announces its decision on Wednesday.
The Fed relies primarily on the Personal Consumption Expenditures (PCE) price index, published by the Department of Commerce, as its preferred indicator of inflation. While PPI and CPI data are not direct indicators of the Fed’s decision making, they contribute to the bigger picture of inflation.
According to the latest estimates from the Atlanta Fed, PCE inflation in November is expected to reach 2.6%, up 0.3 percentage points compared to October. Core PCE, which excludes food and energy, is expected to rise to 3%, up 0.2 percentage points. Both measures remain above the Fed’s 2% target, although core inflation is considered a more reliable long-term indicator.
Stock market futures reacted modestly to the economic news, falling slightly into negative territory. Treasury yields showed mixed movements, while data from CME Group indicated that the probability of a Fed rate cut next week remains at 98%.
Concerns about the job market are growing
A key factor fueling market expectations for a rate cut is the Federal Reserve’s increasing focus on labor market conditions. While nonfarm payroll growth has continued every month since December 2020, the pace of hiring has slowed in recent months. Adding to concerns, Thursday’s jobless claims report revealed a notable increase in layoffs and extended periods of unemployment.
Initial jobless claims reached their highest level since early October, and continuing claims, which reflect people still receiving unemployment benefits, rose to 1.89 million. The four-week moving average of rolling claims, which helps smooth out weekly volatility, rose to its highest level in more than four years.
These developments suggest that while the labor market remains resilient overall, cracks are beginning to emerge. Increased layoffs and longer unemployment could signal a potential cooling in the labor market, a trend the Federal Reserve is monitoring closely as it weighs future policy decisions.
Mixed signals for the economy
November economic data paints a complex picture. On the one hand, inflation remains high, with both wholesale and consumer prices showing signs of persistence in some categories. On the other hand, the labor market is showing early signs of weakening, raising concerns about the broader economic outlook.
For now, the Federal Reserve appears poised to proceed with a modest rate cut, a move that reflects its delicate balance between supporting economic growth and containing inflationary pressures. As markets and policymakers await further data, the interplay between inflation and labor market trends will remain a focal point in shaping the economic narrative for months to come.