Producer Prices Unexpectedly Drop

Inflation at the producer level had been flat and unexpectedly went into reverse in September, down 0.3 percent on the month both overall and when excluding food and energy. Year-on-year prices fell 4 tenths to 1.4 percent overall with ex-food ex-energy down 3 tenths to 2.0 percent. When excluding food and energy as well as trade services, which track input prices for wholesalers and retailers, prices were unchanged on the month and down 2 tenths on the year to 1.7 percent.

Food prices have been showing some pressure, up 0.3 percent on the month for a 2.7 percent yearly gain. Prices of government purchased foods are leading this group with a 3.6 percent yearly gain, with consumer foods at 2.6 percent and foods for export at 2.7 percent. Energy prices, in contrast, are in the minus column, down 2.5 percent on the month for 8.7 percent yearly contraction.

Overall service prices fell 0.2 percent in the month with trade services down a steep 1.0 percent. Yearly readings here are plus 2.2 percent and, despite the monthly dip, a still very respectable plus 3.1 percent for trade services. In contrast, goods prices have fallen sharply the last two reports, down 0.4 and down 0.5 percent respectively in September and August with this yearly rate at minus 0.5 percent.

Personal consumption measures, which offer indications on what to expect for September PCE price indexes, are very soft in today's report, down 0.3 percent overall and down 0.2 percent on the month when excluding food and energy.

Inflation had been showing some pressure including three prior 0.3 percent monthly increases for core consumer prices and what had been a four-month elevated streak for average hourly earnings which, however, flattened out noticeably in last week's employment report for September. If inflation is in fact moving higher, it is no more than creeping higher and looks to be under what the Federal Reserve is hoping for. If consumer prices in Thursday's report show similar softness as today's report, which they are expected to, policy momentum is likely to shift to the doves in the FOMC's debate for further rate cuts.