The U.S. inflation rate remains elevated based on new statistics released by the U.S. Bureau of Labor Statistics (BLS) on Tuesday morning.
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The Producer Price Index (PPI), a measure of inflation at the wholesale or producer level, is stacked at 8.6% in October of 2021, the same as in September. That’s the highest level since at least November of 2010.
PPI Elevated, but In Line with Expectations
Though elevated, the October PPI number was slightly below market expectations. Thus, the muted response of financial markets. At 9 a.m., major equity indexes were mixed, with S&P 500 and Nasdaq futures up slightly and Dow Jones futures down a few points. Meanwhile, U.S. Treasury bonds prices pushed yields 4% lower.
Apparently, Wall Street is in a relief mode, as these numbers could have been far worse.
Inflation Remains in Energy, Food
As any consumer who goes food shopping and buys gas at the local gas station would have expected, the rise in prices is concentrated in food and energy.
“Over 60 percent of the October increase in the index for final demand can be traced to a 1.2-percent rise in prices for final demand goods. The index for final demand services moved up 0.2 percent, and prices for final demand construction advanced 6.6 percent,” says the BLS report. “Prices for final demand for less foods, energy, and trade services moved up 0.4 percent in October after increasing 0.1 percent in September. For the 12 months ended in October, the index for final demand less foods, energy, and trade services rose 6.2 percent.”
Food and energy are usually the most volatile components of the PPI, as they are at the whim of weather conditions and supply interruptions due to transportation bottlenecks and other supply-side frictions. These factors aren’t one-sided, meaning that they can move in the other direction, helping ease food and energy inflation.
That’s why market analysts and the Fed focus on the PPI, excluding food and energy, which is a better indicator of the inflation trend. Thus, the big rally in U.S. Treasuries following the release of the PPI numbers.
Inflation is a significant factor setting the pace for the U.S. Treasury markets, as investors factor future inflation in their decisions. When inflation numbers come out stronger than expected, bond prices head lower and yield higher. By contrast, when inflation numbers come out weaker than expected, bond prices run higher and yields lower, as was the case Tuesday.
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