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U.S. producer prices edged up modestly in December, reflecting a balance between higher goods costs and stable service prices. The producer price index (PPI) for final demand rose by 0.2%, following a 0.4% gain in November, according to the Labor Department. Year-on-year, the PPI increased by 3.3%, marking its highest annual pace since February 2023. The data suggests inflationary pressures are moderating, with core PPI—excluding volatile food and energy components—rising by just 0.1% for the second consecutive month. Wholesale food prices saw a slight decline, offsetting a sharp rise in energy costs, while service prices remained flat.

Despite easing inflation trends, economists caution that the Federal Reserve is unlikely to cut interest rates before mid-2025, given the robust labor market and potential inflationary risks tied to President-elect Donald Trump's proposed tariffs and tax policies. Goldman Sachs (GS) has revised its rate cut expectations down to two for the year, while Bank of America (BAC) anticipates the Fed’s easing cycle is over. Treasury yields (TLT) slipped on the PPI data, and the dollar softened slightly against a basket of currencies. Analysts are closely watching upcoming consumer price data, which could further clarify the inflation outlook.

Market Overview:

• Producer Price Index rose 0.2% in December, driven by a 3.5% surge in energy prices.


• Core PPI, excluding food and energy, increased 0.1% for the second month in a row.


• Year-on-year PPI climbed 3.3%, the highest annual rate since February 2023.

Key Points:

• Wholesale food prices dipped 0.1%, offsetting higher energy costs.


• Service prices remained flat, with declines in hospitality costs balancing higher transportation fees.


• Analysts estimate core PCE inflation rose 0.2% in December, based on PPI data.

Looking Ahead:

• The Federal Reserve is expected to maintain its current interest rate policy through mid-2025.


• Upcoming consumer price data will be pivotal for assessing inflation trends and policy direction.


• Potential tariffs and fiscal policies under the new administration may amplify inflation risks.

Bull Case:

• The modest 0.2% rise in December's PPI, along with a 0.1% increase in core PPI, signals easing inflationary pressures, which could stabilize economic conditions.


• Flat service prices and a slight decline in wholesale food costs reflect balanced pricing dynamics, reducing the likelihood of runaway inflation.


• Energy-driven price increases may taper off as supply stabilizes, further alleviating inflation concerns in the coming months.


• The Federal Reserve's cautious approach to maintaining current interest rates ensures economic stability while allowing inflation trends to moderate naturally.


• Upcoming consumer price data could confirm a steady inflation trajectory, bolstering investor confidence and supporting market resilience.

Bear Case:

• The 3.3% year-on-year increase in PPI, the highest since February 2023, highlights persistent inflationary pressures that may challenge the Federal Reserve’s policy stance.


• Potential tariffs and fiscal policies under President-elect Donald Trump could amplify inflation risks, complicating monetary policy decisions and market stability.


• Energy price surges of 3.5% in December may continue to exert upward pressure on overall inflation, straining household budgets and business costs.


• Goldman Sachs and Bank of America’s revised rate cut expectations suggest limited monetary easing, potentially dampening economic growth prospects in 2025.


• Flat service prices mask underlying volatility in sectors like transportation and hospitality, which could reemerge as inflation drivers in the near term.

Stable service costs and mixed goods pricing signal a nuanced inflation landscape, underscoring the Fed's cautious approach to monetary policy adjustments. Energy-driven pressures remain a focal point, as policymakers weigh economic resilience against inflation risks. Analysts predict modest economic growth and steady monetary policy in the near term, contingent on fiscal developments andglobal marketconditions.

The data reinforces the Fed’s emphasis on balancing growth with inflation control, ensuring stability amid shifting macroeconomic variables. As the labor market shows strength and inflation indicators moderate, markets await further clarity from consumer price data and central bank policy statements.
This article was originally published on Quiver News, read the full story.

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