Mon. Jan 17th, 2022

The producer price index slipped in December, but the month ended a year of record wholesale price inflation.

First, the good news: wholesale price inflation in the United States shifted in December.

Now for the bad: the statement limited the biggest increase in wholesale inflation on record in the calendar year.

The Producer Price Index (PPI), which measures changes in the prices that businesses measure for goods and services, rose 0.2 percent in December, the U.S. Bureau of Labor Statistics said Thursday. This was a sharp slowdown from the previous month’s 1 percent increase and was the most modest increase in wholesale prices since November 2020.

But what a lightning year it was for inflation. Wholesale prices rose by 9.7 percent in 2021 – the largest calendar increase on records dating back to 2010.

Businesses are grappling with higher costs for raw materials as the economy continues to grapple with the supply chain norms and deficits resulting from COVID-19 disruptions.

Workers, who have a shortage in the US, also demand higher pay and better benefits for their labor.

As businesses are hit by those higher costs, they pass on at least a portion of it to consumers. This was evident in the prices consumers paid in December for goods and services, which saw their largest annual increase since 1982.

Last year’s inflation rises were largely driven by demand for goods exceeding supply, as consumers flushed with cash but were still wary of paying for customer-oriented services such as airline flights and eateries, which sparked pent-up demand.

Policy makers at the Federal Reserve see inflation declining by the middle of this year, and the December PPI data did send encouraging signals that their forecast could come out.

Prices for final demand goods fell by 0.4 percent last month – the first decline since April 2020. Falling food and energy prices led the decline. And price increases for services also slipped last month.

Syrup food and energy, which tend to be the most volatile component of inflation indices, and the core PPI rose 0.4 percent in December, after rising 0.8 percent in November.

But despite the signals of cooling inflation, analysts warn there are potential winds in the short-term outlook. The fast-spreading Omicron variant of coronavirus has caused flight cancellations and a spate of sick workers reporting – exacerbating supply chain disruptions and an already acute labor shortage.

“Persistent supply disruptions will support producer prices near record levels in the near term, especially given a rapidly spreading Omicron variant that will fuel inflationary pressures,” said Mahir Rasheed, US economist at Oxford Economics.

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