- The US producer price index (PPI) fell 0.2% in October 2013, which was in line with market expectations following a 0.1% drop in September, and largely on account of the energy price index plunging 1.5% in the month. The year-over-year pace of increase held steady at a near three-year low of 0.3%.
- Excluding both the volatile food and energy components, the core producer price index inched up 0.2% in October following a similarly modest 0.1% gain in September. The year-over-year rate of core price growth improved to 1.4% after holding steady at 1.2% in each of the previous three months.
- While the quiescent headline PPI inflation reading reflected recent weakness in the volatile energy component, the muted annual pace of core producer price growth indicated that, despite continued job gains, remaining excess capacity in labour markets is keeping a lid on underlying inflationary pressures. The benign inflation backdrop leaves the Federal Reserve free to maintain a highly stimulative monetary policy stance to support a faster pace of economic growth and sustain downward pressure on the unemployment rate. We expect the Fed will begin to taper its pace of bond purchases in the spring of 2014; however, the first hike in the federal funds rate remains unlikely until later in 2015.
- In a separate report, initial jobless claims dropped to 323,000 in the week ending November 16, 2013 from a revised 344,000 (was 339,000) the previous week. The level of claims in the latest week was below market expectations for a 335,000 reading. The four-week moving average of claims eased to 338,500 from 345,300 the previous week.
Producer prices dropped 0.2% in October 2013, which was in line with market expectations, and represented slight deterioration from the -0.1% pace in September. The year-over-year rate of growth held steady at 0.3% to mark the slowest pace of growth in nearly three years and remained well below the recent high of 2.5% in June. Energy prices plunged 1.5% in the month, thereby marking the first decline since July after modest gains of 0.5% and 0.8% in September and August, respectively. Food prices provided some offset by rising 0.8% in October and partially retraced the 1.0% drop in September.
Excluding both of the volatile food and energy components, core producer prices provided only modest offset in posting a 0.2% gain that was slightly above market expectations for a 0.1% increase. The year-over-year rate of growth in core prices improved to 1.4% after holding steady at 1.2% in each of the previous three months, which marked the slowest pace of annual growth in core prices since November 2010.
The recent government shutdown delayed the survey collection for producer prices by one week although the response rate was within the ‘normal range’ and thereby likely did not have a material effect on the monthly inflation measure. While the quiescent headline PPI inflation reading reflected recent weakness in the volatile energy component, the muted annual pace of core producer price growth indicated that, despite continued job gains, remaining excess capacity in labour markets is keeping a lid on underlying inflationary pressures. The benign inflation backdrop leaves the Federal Reserve free to maintain a highly stimulative monetary policy stance to support a faster pace of economic growth, thus sustaining downward pressure on the unemployment rate. We expect the Fed will begin to taper its pace of bond purchases in the spring of next year; however, the first hike in the federal funds rate remains unlikely until later in 2015.
In a separate report, initial jobless claims dropped 21,000 to 323,000 in the week ending November 16, 2013 from a revised 344,000 (was 339,000) the previous week. The level of claims in the latest week was below market expectations for a 335,000 reading; however, the inclusion of the Veterans’ Day holiday, according to the US Labor Department, made adjusting the data for seasonal swings more difficult. The four-week moving average of claims eased to 338,500 from 345,300 the previous week.
RBC