Producer-Price Increases Slowed From Record Pace in December

However, prices remain much higher than they were a year ago, climbing 9.7% on a 12-month basis, down just slightly from November’s revised 9.8% rise, the fastest since records began in 2010.

The producer-price numbers, which generally reflect supply conditions in the economy, suggest that uncomfortably high consumer inflation will persist in 2022, though the pace of price gains might begin to slow or gradually reverse. The consumer-price index hit a 39-year high of 7% in December, the Labor Department said on Wednesday.

Mahir Rasheed, U.S. economist at Oxford Economics, said that though the slowdown in producer-price inflation was encouraging, he expects inflation to remain high throughout the U.S. supply chain in early 2022. He added that the effects of the Omicron variant could push them up further.

“Persistent supply disruptions will pin producer prices near record levels in the near term, especially given a rapidly spreading Omicron variant that will fan inflation pressures,” he said. The numbers add to the evidence that the Federal Reserve will begin lifting rates in March, Mr. Rasheed said.

Much of the producer-price index’s deceleration came from a drop in energy prices, which declined 3.3% last month, as well as a slighter decrease in food prices. What are known as core prices, which exclude volatile food and energy components, rose 0.5% from the month before, down from a revised 0.9% in November. On a 12-month basis, core prices leapt 8.3%, the fastest pace on record.

Core-goods prices rose 0.5% from November, slower than the pace for much of the last year, though still much higher than the 0.1% average growth in the decade before the pandemic.

Economists and the Federal Reserve expect inflation to ease this year as supply bottlenecks clear and demand normalizes, but say it is hard to estimate how fast that might happen.

Cecilia Rouse, chairwoman of the White House Council of Economic Advisers, said that despite the role of declining food and energy prices, the easing of the producer-price index also reflects potential improvement in price pressures related to strained supply chains. “Today’s report underscores the importance of the administration’s work on supply chains,” she said.

Other data point to a possible improvement in supply-chain woes. A December survey of manufacturers by the Institute for Supply Management showed a decline in prices and delivery times, signaling that materials shortages might be easing.

Joshua Shapiro, an economist at consulting firm Maria Fiorini Ramirez Inc., said that weakness in the dollar, which boosted the cost of imports in early 2021 when inflation started building, has been a compounding factor behind higher U.S. prices. However, the dollar strengthened somewhat in the second half of 2021, which should increase the purchasing power of U.S. businesses.

“If the supply chain stuff is starting to get ironed out…and the dollar strength feeds in there, you can see the goods side continue to moderate,” said Mr. Shapiro. “A lot of ‘ifs’ there, but at least they’re in the right direction.”

A continued moderation of producer-level prices won’t necessarily translate directly to easing consumer prices–and other signals suggest a pickup in inflation on the horizon.

“Similar to yesterday’s core CPI reading, the most prominent feature of the data is the persistent increase in core-goods prices across a range of categories,” said Andrew Hollenhorst, chief U.S. economist at Citigroup Inc. “While a moderation in goods prices in PPI could be a signal of easing consumer-goods price pressures, we do not expect to see this in [the CPI] data anytime soon.”

Write to Gwynn Guilford at [email protected]