The US Producer Price Index increased robustly in October. This was driven by high costs for motor vehicle retailing and gasoline. It shows that high inflation could stay for a while due to the tight global supply chains related to the coronavirus pandemic. In the previous weeks, the Federal Reserve has reiterated its belief that the current high inflation will be temporary. A narrowing labor market is a major cause. This is because millions of citizens remain at home, which is contributing to the price pressures. Combined with the shortages of goods supply, it has hindered growth in the third quarter. The Federal Reserve has started decreasing the amount of cash it is infusing into the economy through its bond purchases which happen monthly. US Producer Price Index for final demand increased by 0.6% in October after 0.5% in September. This has reverted the slowing trend in the monthly US Producer Price Index since spring.
The Labor Department has reported the figures. In the past year through October, the US Producer Price Index grew by 8.6% after a similar increase in September. Experts had forecasted the US Producer Price Index to grow 0.6% monthly and increase by 8.7% year-on-year. More than 60% of the growth in the US Producer Price Index in October was because of a 1.2% increase in the prices of goods. This was following a 1.3% increase in September. An increase of 6.7% in gasoline prices accounted for nearly a third of the increase in the prices of goods. There was growth in the prices of jet fuel, gas, diesel, and plastic resins. The wholesale food prices decreased by 0.1% as the price of veal and beef went down by 10.3%. The costs for light motor trucks decreased as the government introduced new-model-year passenger vehicles and light motor trucks in the US Producer Price Index.
The high motor car costs have accounted for much inflation as a worldwide semiconductor shortage linked to the lengthy coronavirus pandemic has forced manufacturers to decrease production. This has left virtually no inventory. The services increased by 0.2% in the previous month after a similar increase in September. An 8.9% increase in margins for parts retailing and automobiles accounted for more than 80% of the growth in services. The cost of warehousing services and transportation increased by 1.7%. This also reflected the restricted supply chains. The Institute for Supply Management held surveys in October that showed that prices paid by services industries and manufacturers increased in October.
The manufacturers complained about the difficulties in transporting goods, increasing commodities prices, continued shortfall of vital materials, and long lead times for raw materials. According to a forecast of experts, other data is expected to show robust increases in consumer prices in October. The stocks on Wall Street declined from a record high. The dollar was going sideways against a basket of currencies. The US treasury prices increased. Ryan Sweet, the senior economist at Moody's Analytics, said, "The acceleration in inflation may not fade as quickly as previously thought, particularly for businesses because of the global supply-chain issues. Elevated inflation is turning up the heat on the Fed. However, they have not shown signs of buckling as they will stomach higher inflation to get the labor market back to full employment quickly."
US Producer Price Index data hints at port congestion
There is much congestion at ports and great shortages of workers at warehouses and docks. There were more than ten million job openings at the beginning of September. The workforce has declined by more than two million jobs from its pre-pandemic level. The worker shortages were underlined by a report from the NFIB that showed that nearly half of small businesses had job openings that they could not fill in the previous month. The Federal Reserve chairman Jerome Powell has said the Federal Reserve is committed to ensuring maximum employment. He said this at a virtual conference on diversity and inclusion in central banking, finance, and economics. Powell also said that an economy is more robust and healthier when the maximum workforce is at work.
The wholesale prices of footwear and apparel and truck transportation of freight also increased in October, as did the prices of alcohol retailing, food, equipment supplies, parts, and hospital machinery and outpatient care. Excluding the volatile trade services, energy, and food components, the producer prices increased by 0.4%. The so-called core US Producer Price Index increased by 0.1% in September. In the past year through October, the core US Producer Price Index increased by 6.2%. An advance of 5.9% followed this in September. The construction prices increased by 6.6%. This was the biggest growth since the series was incorporated in the US Producer Price Index data nearly 12 years ago. The details of the US Producer Price Index components, which go into the personal consumption expenditures price index, excluding the food and energy sector, were mixed.
The core PCE price index is the preferred measure of the Federal Reserve for its flexible 2% target. The healthcare costs grew by 0.4%. Portfolio management fees decreased by 2.2%, and airline tickets increased by 0.3%. The October CPI data is still pending, but experts say the core PCE price index grew higher last month after growing 3.6% year-on-year in September. Will Compernolle, a senior economist at FHN Financial, said, "As companies feel the squeeze from higher energy and labor costs, as well as persistent logistics issues, producer price increases should be robust in the coming months." Daniel Silver, economist at JPMorgan, said, "For now, we think the core PCE price index will be up 3.8% year-on-year in October."
Federal Reserve Chair Powell Touts Advantages of Maximum Employment
The US Federal Reserve is looking at a broad range of indicators to determine how close the economy is to full employment. The Federal Reserve Chairman Jerome Powell stated this. He reiterated the advantages of targeting workers who stay on the sidelines. He said that any economy is stronger and healthier when most of the workforce is at work. The remarks were made at a virtual conference on inclusion and diversity in economics, finance, and central banking. The event was co-hosted by the Federal Reserve and other major central banks. The Federal Reserve will start later this month to eliminate the first pillar of extraordinary stimulus that it started in March of the previous year to shield the economy from the effects of the coronavirus pandemic. The Federal Reserve will begin to decrease its huge bond purchases.
The officials have said that robust job gains and economic growth show that the economy can now stand independently. But Powell has said that the Federal Reserve would be patient and emphasize further strides towards maximum employment before increasing the interest rates. This is despite anticipations of higher-than-expected inflation. But there is a growing debate among the policymakers about how much the economy can add more jobs and how much longer can high inflation be tolerated, with investors presently expecting growth in interest rate in the middle of the following year. Jerome Powell said, "When we assess whether we are at maximum employment, we purposely look at a wide range of indicators. In doing so, the Fed is attentive to labor market disparities, rather than just the headline numbers."
The job growth has averaged nearly 600,000 per month this year, but the labor force has decreased by more than 2 million from its pre-pandemic mark. President Joe Biden has already stated his intention of re-nominating Jerome Powell for a second term as the head of the Federal Reserve.