Producer Price Index Steady in November 2022, Services Pressures Remain a Concern

By PNC Senior Economist Kurt Rankin

• The Final Demand Producer Price Index (PPI) rose by 0.3% in November 2022
• Core PPI, less Food & Energy, accelerated in November 2022 to 0.4% for the month
• Energy PPI declined sharply in November 2022, down 3.3% for the month
• Producer price pressures continue to center on Services (+0.4%), with Goods prices showing significant deceleration (+0.1%)

The Producer Price Index (PPI) for November 2022 rose versus the month prior, up 0.3% versus October. This translates to a 7.4% year-over-year gain, which is down from the peak pace of 11.7% mark posted in March 2022. November’s 7.4% is the slowest year-over-year pace recorded since May 2021 (+6.9%). More importantly, the November monthly rise equals 3.6% at an annualized pace, representing producer price inflation if current conditions were to be maintained for a one-year period. This metric has come in under 4.0% for the past five months consecutively, including two outright declines in the topline PPI measure in July & August. Further deceleration in the monthly annualized pace of gains in producer prices will be necessary before consumer price inflation concerns can be resolved.

Producers’ Energy prices declined in November 2022 versus October by 3.3%. The PPI Energy component index now sits below the March 2022 level reached after Russia’s invasion of Ukraine. This is a good sign for inflationary trends, broadly speaking, as energy costs filter through to all sectors of the economy – industrial and consumer. With oil prices falling further thus far in December, at least there appears to be no renewed threat of a reignition of energy costs that would prevent inflation from continuing to ease in the coming months.

On the other hand, Food prices surged in November 2022 according to that PPI component index. The Food cost measure of the PPI rose by 3.3% for the month versus October, offsetting the relief seen in the Energy segment.

Inflation across household necessities is the biggest concern for the U.S. economy as consumers continue to spend through their stimulus-supplemented savings and rapidly accumulate credit card debt — all while inflation eats away at real-time spending power since wage growth has not kept up with inflation. With Food PPI rising strongly in November, one can be sure to see continued upward pressure on household grocery bills as those producer prices are passed on to the retail level. The holiday shopping season will likely be accompanied by plenty of restaurant goers as well, meaning higher costs for the ‘Food Away from Home’ category.

Overall inflation is moving in the right direction, though at a slow pace. The Federal Reserve’s monetary policy tightening plans will remain aggressive until clear, consistent signs of inflation’s demise have been demonstrated.

The “Demand Destruction” among households that the Fed has aimed at through higher borrowing costs has been evident in the U.S. housing market, with Existing Single-Family Homes through October 2022 declining all the way to levels not seen since 2011. But consumers have not cut back on smaller, everyday goods and –even more so – services purchases thus far. U.S. households’ indomitable spending habits are set to contribute to a recession in 2023 after those same consumers hit a wall in their spending capacity by mid-year, coupled with higher debt levels and reduced savings cushions. And once the U.S. consumer does pull back in aggregate, an economic contraction is virtually unavoidable given that 70% of U.S. economic activity is dependent upon workers bringing home a paycheck, and then spending that paycheck.

Data from 12/9/22.