Because the Bureau of Labor Statistics is one of the only agencies to receive funding prior to the government shutdown, the producer price index (PPI), along with employment statistics, is one of the few data points still being collected at this time. We watch the PPI for signs of what inflation may be doing in the pipeline. So far, tariff increases that showed up in the price of goods have not been fully passed onto consumers. That’s one of several signs the Federal Reserve will welcome, giving it more latitude to be “patient” and pause. The lack of pass-through inflation is hardest on producers, many of whom have had to absorb the higher costs of tariffs and wages.
The overall PPI fell 0.2% in December, after an upward 0.1% revision in November. A sharp 13.1% drop in prices at the pump weighed heavily on the index, with ripple effects being felt on the costs of transportation services and warehousing. Airline fares also moved lower, although reports before Christmas suggested that those were due more to a slowdown in business travel than falling fuel prices. Major airlines noted a pre-holiday slump in business travel that will no doubt worsen as the government shutdown continues. Waits at some airports are starting to skyrocket as more TSA personnel are calling in sick, resulting in missed flights and delayed trips. The hotel industry is also beginning to complain, although it performed well ahead of the government shut down, with strong tourism allowing for price increases during the holiday season.
The overall PPI held at a 2.5% year-over-year rate, the same as November. This is almost a full percent below the peak pace hit in July 2018, but still well above the less than 2% annual pace of producer inflation we saw earlier in the cycle.
The core (non food and energy) PPI edged up 0.1%. An increase in services offset price declines elsewhere. Year-over-year gains held at 2.8% for the third consecutive month, only 0.2% below the peak hit in July and August. This will allow the Federal Reserve to remain “patient” on a rate hike for now, while it watches closely for any upward movement in core inflation once the recent drop in energy prices plays out.
Lower energy prices are holding costs in check. Depending on how long the government shutdown continues, it seems reasonable to expect that it will exacerbate some of the weaknesses we are seeing in business travel. This will keep the Fed on the sidelines until we can get a more complete picture of the economic slowdown and the effects of the shutdown later this year.
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