PPI Unexpectedly Declines Second Month; Another Big Decline Likely Next Month

Economists expected US strength would hold up producer prices but they have been way off the mark for two consecutive months.

Following last month's 0.5% decline the Bloomberg Economists' Consensus was for a bounce to +0.2%. Instead, the PPI declined by 0.4%, well below the lowest economist's estimate of -0.1%.

Demand for services had been holding up producer prices but not for the last two reports. PPI-FD fell an unexpected 0.4 percent in October vs Econoday expectations for a 0.2 percent gain and vs a low estimate of minus 0.1 percent. Year-on-year, prices are down a very sizable 1.6 percent. Services prices fell 0.3 percent in October following what was then an unexpected 0.4 percent decline in September. Year-on-year, services prices are up only 0.1 percent. Services are supposed to be insulated from global effects including price effects, and the downturn for this reading does not point to 2 percent target inflation anytime soon.

Energy prices were unchanged in the month but are down very sharply year-on-year, at 21.5 percent. Food prices fell 0.8 percent for a 4.2 percent year-on-year decline. Excluding food and energy, prices fell 0.3 percent for a second straight month with the year-on-year reading at plus 0.1 percent. Excluding food, energy & services, prices fell 0.1 percent with the year-on-year at plus 0.4 percent.

Finished goods readings are also very weak, down a total 0.3 percent in the month for a 4.1 percent year-on-year decline. Export prices fell 0.3 percent for a 3.7 percent on year decline.

This report, like import & export prices released earlier this week, is soft throughout and does not point to any pressure for next week's consumer price report. The employment side of the Fed's mandate may be showing pressure, but not prices, at least not yet.

$CRB - Commodities Index Daily



$CRB Commodities Detail



West Texas Crude



Crude started the month at $46.43. It is now at $40.50,down all but two days this month.

Expect Another Big Decline Next Month

The PPI sank in October despite commodities posting average increases for the month.

Given commodity prices have been hammered so far in November, expect another big PPI decline next month unless commodity prices rise, especially oil, rise sharply. Petroleum products constitute 33% of the CRB.

By the way, it's important to note that  producer prices declining in the face of steady or slightly up commodities is a reflection on final demand. I suggest demand is dropping more than most economists realize.

Mike "Mish" Shedlock