U.S. Producer Prices Rose 0.4% in December, Core Prices Up 0.3%

• The US producer price index (PPI) rose by an expected 0.4% in December 2013, and the year-over-year rate increased to 1.2% from 0.7% in November
• Energy prices increased 1.6% in December following a 0.4 dip in November. Food prices fell 0.6% following an unchanged reading in November
• Excluding both the volatile food and energy components, the core producer price index increased 0.3% in December while the year-over-year rate inched upward to 1.4% from 1.3%
• After holding below 1.0% in the previous three months, today’s report showed that prices at the producer level reaccelerated in December. Part of the recent historically slow pace of annual growth in the overall PPI reflected the effect of price declines in the volatile energy component and modest, yet slowing, food price gains. Core price growth, while up slightly from lower levels earlier this year, also remained historically modest. Despite ongoing signs of improvement in the economic backdrop, significant economic slack continues to keep inflation pressures well contained. With that said, the Fed’s assessment that the improvement in the momentum in labour market and general economic conditions was sustainable led policymakers to tweak the bond buying program in December. We expect that the economy will be able to maintain the stronger momentum exhibited in the second half of 2013, thereby keeping downward pressure on the unemployment rate, gradually reducing the amount of spare capacity in the economy, and underpinning a return of inflation to the 2% target.

Producer prices increased by 0.4% in December 2013, thereby meeting market expectations. The year-over-year rate of producer inflation increased to 1.2% from 0.7% in November and 0.3% in September and October. Energy prices recovered and rose by 1.6%, and the annual pace of increase in the measure was 1.3%. Food prices dipped by 0.6%. On a year-over-year basis, food price growth held at 0.6%, thereby marking the slowest pace of annual growth in the component since November 2009.

Excluding the food and energy components, the core PPI rose by a larger than expected 0.3% in December. The year-over-year rate of increase was 1.4% from 1.3% in November. In 2013, producer prices increased by 1.5% on average with the core rate at 1.2%.

After holding below 1.0% in the previous three months, today’s report showed that prices at the producer level reaccelerated in December. Part of the recent historically slow pace of annual growth in the overall PPI reflected the effect of price declines in the volatile energy component and modest, yet slowing, food price gains. Core price growth, while up slightly from lower levels earlier this year, also remained historically modest. Despite ongoing signs of improvement in the economic backdrop, significant economic slack continues to keep inflation pressures well contained. With that said, the Fed’s assessment that the improvement in the momentum in labour market and general economic conditions was sustainable led policymakers to tweak the bond buying program in December. We expect that the economy will be able to maintain the stronger momentum exhibited in the second half of 2013, thereby keeping downward pressure on the unemployment rate, gradually reducing the amount of spare capacity in the economy, and underpinning a return of inflation to the 2% target.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.

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