Breaking a three-month slide, the headline PPI increased 0.2 percent in January on the strength from consumer food prices. Fundamentals, however, are still conducive to a contained near-term inflation outlook.

Wholesale Consumer Food Inflation Rebounds

Setting up a weak end to the year, headline PPI declined for three straight months as energy prices moderated against a soft fourth quarter economic performance. Indeed, we now know GDP growth in the two largest economies–the United States and the Eurozone–contracted in the fourth quarter (however, recent data does suggest an upward revision back into positive territory for the United States). The three-month slide in prices, however, came to an end in January, as prices for finished goods increased a slightly weaker-than-expected 0.2 percent.

The primary driver of strength last month turned out to be consumer foods, not energy. Almost reversing December’s 0.8 percent decline, and accounting for over three quarters of the rise in headline PPI, finished consumer foods resumed its upward trend and increased 0.7 percent in January. Last month’s advance was largely attributable to a 39 percent jump in fresh and dry vegetables, but gains in soft drinks and candy and nuts were also reported. Upward pressure on consumer food prices as a result of last summer’s drought have been a risk to the outlook. But, at least so far, pass-through to consumers has been limited, as consumer food price inflation stands at a manageable 1.8 percent year over year.
While unadjusted prices increased, seasonally adjusted energy prices declined. For the fourth straight month, prices of finished energy goods fell, down 0.4 percent, led by a 2.1 percent contraction in gasoline prices. Given oil’s recent strength and less favorable seasonal adjustment this month, we should see a substantial monthly increase in energy prices when the February report is released.

Outside of food and energy, wholesale prices remained firm. The Core PPI increased 0.2 percent. The main drivers proved to be pharmaceuticals and communication & related equipment. Historically, wholesalers and manufacturers have used January as a testing ground to see if firms can pass along higher input costs that will help preserve profit margins. The seasonal adjustment process should cause this trend to pick this up. But, there are some sectors, like pharmaceuticals, which have shown a tendency to increase substantially at the beginning of each new year. That trend proved true again this year as pharmaceutical preparations jumped 2.5 percent. Weakness was also seen in motor vehicles as passenger car prices fell 0.8 percent, while light truck prices declined 0.4 percent.

Looking further back in the production pipeline, inflation pressures were modest as intermediate prices remained flat and crude goods prices advanced 0.8 percent. Taken together, the Fed should digest today’s report as further confirmation that wholesale inflation is not problematic to its highly accommodative monetary policy.