Implications:   In spite of the second month in a row of declining overall producer prices (down 0.1% in November and December), it’s too soon to declare victory over inflation.  Yes, monetary policy is tighter, but engineering miracles are still pulling energy prices lower.  In December, energy prices fell 1.2%, while over the past three months they have fallen at a massive 34.4% annualized rate.  Food prices fell 0.9% in December.  Stripping out these two volatile components shows “core” prices were unchanged in December, bringing the twelve-month change to 1.8%, the lowest reading since December of 2020.  With producer prices now at or below the 2.0% inflation target for both headline and core readings, some will suggest that the inflation fight is complete.  However yesterday’s report on consumer prices shows the Fed still has work to do, with consumer inflation accelerating to close out the year while the critical housing component suggests the path to 2.0% will have bumps along the way. Diving into the details of today’s PPI report shows that goods prices fell 0.4% in December (energy accounted for more than half of that decline), while services prices were unchanged as higher prices for services less trade, transportation, and warehousing were partially offset by a drop in costs for transportation and warehousing.  Further back in the pipeline, processed goods prices fell 0.6% in December and are now down 2.7% in the past year.  Meanwhile unprocessed goods prices fell 4.4% in December and are down 19.0% in the past year.  Monetary policy first affects growth, and then with a longer lag, inflation.  We have yet to see a major impact on growth.  As a result, while we are happy to see some prices retreat, there is little evidence yet that Fed policy has reversed its mistakes.

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