Producer price weakness broadly based

Producer prices fell more than expected in September. Headline PPI was down 0.5% m/m, below forecast (-0.1%) and consensus (-0.2%) expectations. Core PPI declined 0.3% m/m (consensus: 0.1%). Although energy prices remained one of the bigger drags, there was softness across goods and services components, as well as the core measure. Goods fell 1.2% m/m, mainly as a result of energy (-5.9%) and food (-0.8%); core goods were flat. Services inflation declined 0.4% m/m, the lowest reading since February, and the softness was similarly broad based. In particular, the trade component fell 0.4% (previous +0.9%), reversing part of the strong reading in August, which reflected rises in trade margins by wholesalers. On a y/y basis, headline PPI declined 1.1% (from 0.8%), as energy prices continue to weigh on the y/y rate, while core PPI rose 0.8% (from 0.9%).

Headline personal consumption PPI, which is a good indicator of the trend in consumer prices, fell at its fastest pace since January, at 0.6% m/m (-0.5% y/y, Figure 1), owing mainly to personal consumption goods (-1.8%). The core series (excluding food and energy) declined more moderately, at 0.2% m/m (1.6% y/y).

"We see today's report as indicating downside pressures on consumer prices, particularly through the consumer goods channel. This supports our view that the recent dollar strength, weaker demand in emerging markets, and second-round effects from lower commodity prices are likely to weigh on the core goods CPI and lead to a dip in overall core inflation in the coming months. In particular, dollar strength seems to have focused against emerging Asia currencies, where the US imports most of its durables goods from, further suggesting that the pass-through from this channel is likely to be significant.", says Barclays.