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PNC Senior Economist Bill Adams: Year-Ago Total PPI the Highest in Nearly Half a Century,

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but the trend is slowing; inflation will be cooler in 2022

The producer price index for final demand (PPI) rose 0.6% in October from September, matching the consensus forecast. Goods prices rose 1.2% on the month, accounting for over 60% of the aggregate index’s monthly increase. A 6.7% jump in gasoline prices in turn accounted for a third of the month’s increase in goods prices. Food prices for final demand fell 0.1%, with beef and veal prices down 10.3% and fresh eggs down 12.1%.

Services prices rose 0.2%. Margins earned by automobile and parts retailers jumped 8.9%, accounting for 80% of the net increase in services prices. Airline passenger service prices rose 0.3% after dropping 16.9% in September.

Construction costs surged 6.6%, with costs of new warehouse building construction surging 13.0%, new industrial building construction jumping 8.5%, and other categories jumping 5-7%. Supply chain turmoil, higher land prices, and labor shortages continue to push construction costs higher.

PPI excluding foods, energy, and trade services, a.k.a. core PPI rose 0.4% on the month in October after a 0.1% increase in September.

From a year earlier, the final demand index made a new record high increase of 8.6%; data for that index begin in 2009. An older aggregation of producer prices called the producer price index for all commodities jumped 22.2% on the year in October, the highest since the oil crises of the 1970s.

Year-over-year producer price inflation is the highest in nearly a half-century, and energy prices contributed to another high monthly increase in the index. Even so, the trend points to slower price increases ahead. The last three monthly increases in core PPI are the slowest since the beginning of 2021. Price levels will stay high in 2022, but continued increases look to be much slower than in 2021. Since it’s the increase, not the level, that is the inflation rate, the Fed will likely point to slower price increases next year as a reason to wait until late in 2022 to begin raising the federal funds rate. PNC forecasts for the initial rate hike of this cycle to come in December 2022.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.

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