A day after the Labor Department reported that inflation for consumers had remained stubbornly high in September, the department reported that prices paid by sellers decelerated for the second month in a row.
The headline Producer Price Index (PPI) eased to a 0.5% gain on a month-over-month basis, from a 0.7% monthly increase in August, while the core index—excluding food and energy—posted an even larger decline, to an increase of 0.2% on the month from 0.6% previously.
The main difference between PPI and CPI is that owners’ equivalent rent is included in CPI but not in PPI. Owners’ equivalent rent rose by 0.4% in September and accounted for the largest portion, 23.6%, of the total cost basket used in the CPI calculation.
Beneath the headline, about 80% of the gains in producer prices in September were from the rise in final demand goods, which increased by 1.3%, while prices for final demand services were up by only 0.2%.
Prices for trade services—a proxy for wholesale and retail margins—led the increase in the service category with a 0.9% gain on the month.
Strong demand has continued to give businesses more opportunities to widen their profit margins, which suggests that there should be more room for potential price increases to be absorbed by businesses without having to pass them on to consumers.
Based on the new PPI data, the big picture continued to confirm our view that the worst of inflation is now behind us.
While the deceleration in the producer index has put more emphasis on renting costs in the consumer inflation data, we expect that as the pandemic base effects on rents and housing costs ease, the increase in rents may be somewhat less than the headlines suggest.