US producer prices rose at the fastest pace on record in November, piling additional pressure on the Federal Reserve to more swiftly dial down the emergency policy settings it put in place during the pandemic in order to tame surging inflation.
The producer price index published by the Bureau of Labor Statistics on Tuesday jumped 0.8 per cent in November, for an annual increase of 9.6 per cent. That is the fastest year-over-year rate since the data were first collected in 2010.
“Core” producer prices also minted new records. After stripping out volatile items such as food and energy, prices rose 6.9 per cent from the previous year, the biggest advance since August 2014, when the BLS first began its calculations.
The report comes at the start of a two-day meeting for the US central bank, which is actively debating how to adjust the amount of stimulus it is providing to an economy that is currently experiencing the highest inflation in almost 40 years.
The Fed is expected to announce on Wednesday it will scale back its asset purchase programme more quickly, doubling the pace it set just a month ago. The aim is to bring an end to the bond-buying programme several months earlier in order to give the Fed the flexibility to raise interest rates sooner.
Chair Jay Powell set the stage for this pivot several weeks ago when he signalled his support for an earlier exit in the face of what he said were mounting risks that inflation could become a more persistent problem.
Once concentrated to a few sectors most sensitive to pandemic-related reopenings and supply-chain disruptions, such as used cars and travel-related expenses, consumer price inflation has shown clear signs of broadening out.
The BLS noted that last month’s increase in producer prices was also “broad-based”, with expenses related to services, transportation and warehousing moving higher. Prices for iron and steel scrap, as well as gasoline and food items rose as well.
The Fed on Wednesday is also expected to signal multiple interest rate increases next year, with further adjustments pencilled in for subsequent years. In September, the last time the so-called “dot plot” of individual interest rate projections was published, Fed officials were evenly split on whether lift-off from today’s near-zero levels would occur in 2022.
Now, economists anticipate the dot plot to show two rate rises in 2022, followed by three or four subsequent moves in 2023 and again in 2024.
Moderate Democrats are pushing the Fed to do more to contain inflation, which has been politically toxic for the Biden administration as it seeks to pass its $1.75tn Build Back Better spending legislation.
Republicans and some members of the president’s party have resisted the spending package, which comes on the heels of another $1.2tn bipartisan infrastructure bill, citing the increase in prices and the painful costs imposed on Americans by inflation.
White House officials, like most economists, expect inflation to moderate next year, but there is significant uncertainty about when exactly this will begin.
“The numbers are going to be pretty strong for at least the next six months, so it means the rhetoric around inflation is going to continue to mount until the peaking occurs late in the first quarter or second quarter,” said Alan Detmeister, an economist at UBS and a former Fed staffer. “This is all just going to build for the next couple of months.”
Traders on Tuesday shifted their bets following the inflation report, pricing in just under three quarter-point rate rises next year, based on Fed funds futures. Those trades fell just short of a late November peak for expectations of how quickly the Fed would lift rates next year, before the Omicron coronavirus variant rattled markets.
Treasuries sold off, pushing yields on both the two- and 10-year notes up. The selling most acutely hit longer tenors, with the 10-year yield rising 0.04 percentage points to 1.46 per cent. Yields move inversely to a bond’s price.
The potential for more hawkish policy from the US central bank also weighed on the country’s $53tn stock market, with the benchmark S&P 500 sliding further from a record closing high struck on Friday.
Source: Economy - ft.com
