Inflation showed up somewhere in October.
But the increase is due to a technicality.
Producer prices unexpectedly rose 0.2% in October, and on a “core” basis, which excludes food and energy, producer prices rose 0.4%.
Expectations were for prices to fall 0.1% month-on-month in October, while “core” PPI was expected to rise 0.1%.
But there’s a catch.
In a note to clients following the report, Ian Shepherdson at Pantheon Macro said the price increases were boosted by a technicality in the price of gas.
“When gasoline prices fall, the input cost to gas stations drops immediately,” Shepherdson notes. “But retail prices adjust less quickly, so the trade services component of final demand PPI — which measures wholesale and retail margins — records a temporary increase.”
Tuesday’s PPI report showed that on a month-on-month basis, crude oil prices fell 9.8% in October.
And as Shepherdson noted, the trade services component of PPI in October rose 1.5%, which accounts for 23% of the “core” reading, and “explains all the overshoot compared to consensus.”
On a year-over-year basis, PPI rose 1.5%, topping expectations for a 1.3% rise, and rose 1.8% on a “core” basis which beat expectations for a 1.5% increase.
The producer price index measures the change in prices received for domestically produced goods, services, and construction, measuring price change from the perspective of the seller, rather than CPI, which measures prices from the purchaser’s perspective.
Via Pantheon, here’s the chart showing the relationship between gas prices and trade services moving together, but in opposite directions.