Monday Update: Producer Prices Up on Rising Energy Costs

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Nov 12, 2018 1:51:18 PM

and tagged Market Updates

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Monday updateLast week was a busy one on the economic front, with looks at business prices and confidence, as well as consumer confidence. This week’s data starts with prices and whether inflation is picking up.

Last week’s news

On Monday, the Institute for Supply Management Nonmanufacturing index pulled back slightly, as expected. After a surprise increase in September to a 21-year high, it went from 61.6 to 60.3. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. So, even with the small decline, this level remains quite strong. The pullback came from slowing growth in the service sector, but this indicator remains very positive for the economy as a whole.

On Friday, the producer prices report accelerated unexpectedly. The headline index, which includes energy and food, was up by 0.6 percent for October. This result was well above the 0.2 percent expected and the 0.2-percent increase in September. The surprise increase was mostly driven by a rise in energy prices, which may be reversed as oil prices have since dropped. So far, there is little sign that tariffs are driving faster inflation, although supply constraints are driving up trading and warehousing costs. The annual change also increased more than expected. It went to 2.9 percent from 2.6 percent, for the same reasons, and continues to indicate that inflation pressures remain above the Fed’s target range. The core index, which excludes energy and food, also accelerated but not as much. It rose to 0.5 percent for October, up from 0.2 percent in September; the annual figure rose from 2.5 percent to 2.6 percent.

Finally, the University of Michigan consumer confidence survey, also released on Friday, did somewhat better than expected. Confidence pulling back slightly from 98.6 for October to 98.3 for November. This remains a high level, historically, and suggests that consumers are not yet worried about the effects of a trade war, given the continued strong labor market. This should continue to support consumer spending and economic growth.

What to look forward to

On Wednesday, the consumer price reports are expected to show continued inflation at the headline level. The headline index, which includes food and energy, is expected to rise by 0.3 percent in October, up from 0.1 percent in September, on an increase in gasoline costs. The annual figure is expected to rise to 2.5 percent in October from 2.3 percent in September. The core index should rise by less, going from a 0.1-percent increase in September to a 0.2-percent increase for October. Here, the annual figure should remain steady at 2.2 percent. These figures would indicate inflation continues to run somewhat above the Fed’s target levels, which should continue to support interest rate increases.

On Thursday, the retail sales report is expected to show faster growth after two weak months. It is anticipated to go from a 0.1-percent gain in September to a 0.5-percent gain for October, on a price-driven increase in gas sales and replacement auto sales for those damaged by Hurricane Florence. Core retail sales, which exclude autos, are also expected to do well. We should see October growth of 0.5 percent, up from a decline of 0.1 percent in September. There may be some upside risk here, as gasoline prices have risen. If the numbers come in as expected, they would be at healthy levels and positive for the economy.

Finally, on Friday, the industrial production report is expected to tick down a bit. It should go from a gain of 0.3 percent for September to a gain of 0.2 percent for October. There may be some downside risk here, on a weather-related decrease in oil production. Manufacturing is expected to do better, with growth rising from a 0.2-percent gain in September to a 0.3-percent gain in October. Again, there may be some downside risk, as the dollar continues to rise. The expected numbers would indicate continued growth and be positive for the economy.

Thanks for reading and have a great week!

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