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PPI at +0.4% Illustrates Inflation Creep

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Tuesday, December 12, 2017

As the Federal Open Market Committee (FOMC) joins together for Chairwoman Janet Yellen’s final meeting as the head of U.S. monetary policy, expectations are near 100% that the end result tomorrow will be for a quarter-point hike to the Fed funds rate to 1.5%. This is still historically low, but will mark the fifth raise since the Fed cut rates to the bone in the wake of the Great Recession nearly a decade ago.

There is not much room to trade on this news that hasn’t even happened yet; more interesting for speculators will be how many times the Fed raises next year (currently analysts are looking for three quarter-point hikes for calendar 2018). But depending what happens with corporate tax reform, and considering we will have an FOMC headed by incoming Chairman Jay Powell, the blueprint for next year’s interest rate policy is far from etched in stone.

Ahead of today’s opening bell, we see fresh Producer Price Index (PPI) numbers for November: +0.4% on the headline is perhaps a tad hotter than expected, whereas the “core” read (ex-food & energy) is a more in-line +0.3%. This illustrates a steady creep of very modest inflation into the economy, following October’s +0.4% on both headline and core.

Year over year, we see this figure hit +3.1% — the first time PPI has reached a 3-handle in recent memory. This is also good news for Fed participants, who have been making consistent efforts to bring overall inflation to the desired 2% (not too hot, not too cold). As we saw in last Friday’s non-farm payroll report, wage growth has taken some baby steps in this direction of late as well, which is another key metric to understanding the health of the domestic economy.

What market participants really want to see now is the November Consumer Price Index (CPI), which will be released before the opening bell tomorrow. Not only is this the other side of the coin, but the CPI is arguably the more demonstrative for the economy: if the PPI represents the supply side of the equation, CPI is the demand. And as any Business 101 student knows, if there is no demand there need be no supply.

Mark Vickery
Senior Editor

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