The producer price index for final demand undercut expectations in December as core prices didn't budge on the month. The S&P 500 rose early but reversed lower in midday Tuesday stock market action as the data didn't do enough to calm nerves ahead of tomorrow's big CPI inflation release. Markets also are reacting to news that forthcoming Trump tariffs may start small and ratchet higher over time.
The inflation news only produced modest relief, partly because a jump in airfares last month may not bode well for the Federal Reserve's primary inflation gauge, the core PCE price index.
PPI Inflation Hits And Misses
The overall PPI rose 0.2% on the month vs. 0.3% estimates, according to the Econoday consensus forecast. Over the past 12 months, PPI inflation has run 3.3%, in line with 3.3% estimates and up from (a revised) 3% in November.
Core PPI inflation, which strips out food and energy prices, ran at 0.0% on the month and 3.5% from a year ago. Wall Street expected readings of 0.2% and 3.4%. The higher 12-month inflation reading reflected upward revisions to past data.
What The Report Means For The Fed
The PPI and CPI provide most of the inputs that go into the Federal Reserve's primary inflation measure, the core PCE price index. About 70% of core PCE price index movement is tied to CPI inputs.
The PPI's broad measure of health care services inflation, which feeds into the core PCE price index, was unchanged on the month and rose 2.9% from a year ago. Health care services prices are the biggest component of the Fed's primary inflation measure. By contrast, shelter prices are easily the biggest component of the core CPI.
Airline passenger services, a measure of airfares, and portfolio management services also feed into the core PCE price index.
Airline passenger services prices jumped 7.2% on the month, putting the 12-month increase at 5%.
Portfolio management prices rose 0.2%.
After the PPI data, Samuel Tombs, chief U.S economist at Pantheon Macroeconomics, now expects the core PCE price index to rise 0.3% in December, lifting the Fed's key 12-month core inflation rate to 3% from 2.8% in November.
CPI Inflation Preview
There was a lot of uncertainty heading into Wednesday's consumer price index data for December. However, today's PPI data should ease some concerns.
Economists expect the overall CPI to rise 0.3%, with a 0.2% in core prices. On a 12-month basis, CPI inflation is expected to tick up to 2.9% overall, as core inflation holds at 3.3%.
Ahead of the PPI, Pantheon Macroeconomics was forecasting a 0.5% monthly rise in the CPI and a 0.3% increase for the core CPI. The firm highlighted strong holiday demand lifting prices for air travel and accommodation, as well as an expected jump in new vehicle prices.
Fed Rate-Cut Odds
After the PPI, markets were pricing in 3% odds of a Fed rate cut on Jan. 29, according to CME Group's FedWatch tool. Odds of a rate cut stand at 20% for the March 19 Fed meeting, 34% for May 7, and 55% for June 18.
Markets see just 31% odds that the Fed will cut its key rate by more than 25 basis points this year.
S&P 500
The S&P 500 slipped 0.5% late Tuesday morning, giving up moderate early gains after shaking off early losses on Monday to finish up 0.2%.
The S&P 500 finished 4.2% off its Dec. 6 record closing high.
After the PPI data, the 10-year Treasury yield edged down to 4.79%.
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