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PPI Jumps to 0.6%, Oil Prices Fall Again

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Friday, November 9, 2018

A key inflation metric, the Producer Price Index (PPI), cranked up to +0.6% for the month of October — roughly double what analysts had been expecting, and the highest month-over-month increase in the last 6 years. For September, the headline reached +0.2%, which has been unrevised as of this latest report.

Some technical repurposing of this data may account for some of this sudden shift upward; it may take a few subsequent months of data to more accurately tell the tale of forward inflation indicators than this morning’s report. Falling prices in housing and (more lately) energy are two known areas of relative weakness within the general robust economy, but don’t appear to have much an effect on these October numbers.

Stripping out volatile food & energy prices still gets us to +0.5%, as opposed to the 0.2% expected and the 0.4% in the September read. Year over year final demand gets us to +2.9% — higher than expected still, but overall within the ranges we’ve been seeing here in the late-cycle of the bull market. Ex-energy year over year, we see +2.6%. The Energy segment by itself grew 2.7%, apparently not yet accounting for the recent drop in oil prices.

Speaking of oil prices, both key indexes on U.S. crude have tumbled beneath psychologically satisfying levels — the WTO under $60 per barrel and Brent sub-$70 per barrel. It’s the 10th straight down day, and a 20% drop from multi-year highs reached in early October. These figures would suggest a new oil glut in the market, after many months of oil-producing nations working out agreements to shorten supply on a global scale.

The Organization of Petroleum Exporting Countries (OPEC) has newly vowed to address this issue and reverse course. The coalition — consisting of major producers like Saudi Arabia and the U.A.E. in the Middle East and Angola and Nigeria in Africa, among other places — has seen an increase in Saudi production, as well as record crude pumped in the U.S. last week. Russia has also produced the largest amount of crude oil since its days as the USSR.

The vilified nation of Iran sees exemptions from 8 countries to which it may supply its vast resources of crude, which is part of new terms the Trump administration has drawn up to enforce sanctions on the country. This has caused Iran, the key regional rival of U.S. ally Saudi Arabia, to pump more crude as well. Iran is not a member of OPEC.

Pre-market shares are in the red again this morning, although not by much relative to recent index volatility. Asian markets overnight were lower and Europe’s concerns about Italy continue. The healthy Q4 earnings release from Disney (DIS - Free Report) after the bell yesterday is not apparently enough to rescue the domestic markets at this hour.

Mark Vickery
Senior Editor

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