Surprise Inflation in U.S. as Services Grow Pricey

Wholesale prices rose in October despite falling oil prices and lower energy costs.

The producer-price index (PPI) rose 0.2% in October after falling 0.1% in September, according to the Bureau of Labor Statistics.  Expectations for a 0.1% decline were far off due to a rise in trade services, which rose 0.8% in October after rising 0.2% in September.

Transporting and warehousing costs were flat, while other services prices rose 0.1%.  In total, services prices rose 1.6% year-over-year in October, mostly in line with the prior five months.

Wholesale prices rose in October despite falling oil prices and lower energy costs.

The producer-price index (PPI) rose 0.2% in October after falling 0.1% in September, according to the Bureau of Labor Statistics.  Expectations for a 0.1% decline were far off due to a rise in trade services, which rose 0.8% in October after rising 0.2% in September.

Transporting and warehousing costs were flat, while other services prices rose 0.1%.  In total, services prices rose 1.6% year-over-year in October, mostly in line with the prior five months.

Commodity Prices Plunge

While services prices rose in the U.S., producers saw prices for most commodities fall, particularly food and energy materials.  Processed foods and feeds saw a 1.8% price decline and processed energy goods fell 3.2%.  Unprocessed energy materials fell even further, at a -5.5% rate in October, a strong acceleration from the -1.1% price change in September, but still below July’s decline of 5.8%.  Total processed and unprocessed goods prices fell 2.4% in October.

Oil prices have largely driven the decline in PPI for American manufacturers.  WTI oil futures expiring in December remain below $75, while NYMEX heating oil futures, also expiring in December, remain below $2.40 per gallon.  Unprocessed crude petroleum prices fell 9.8% month-over-month in October for producers and were down 21.6% year-over-year.

Gasoline prices have plunged nationwide, with the average price for a gallon of gas falling to $2.89 on November 16, according to AAA, an American-based motoring group.  Goods prices have also fallen 0.4% month-over-month as falling energy costs are passed on to consumers.

High Service Costs, Higher Wages?

Despite weak consumer price growth, producer prices excluding food and energy are up.  Wholesale prices rose 0.4%, much higher than estimates, which economists read as a positive sign that the U.S. has escaped deflationary pressures while avoiding high inflation.  Some economists believe the rise in service costs indicates less slack in the job market as unemployment falls.  If so, the rise in services PPI could be a leading indicator of higher personal incomes in the near term.

Many economists believe that a “trickle-up” effect could result from higher minimum wage hikes in the coming year.  Nine states will see minimum wages rise in 2015: Arizona, Colorado, Florida, Missouri, Montana, New Jersey, Ohio, Oregon, and Washington.  Meanwhile, ten states and Washington D.C. raised their minimum wages in 2014.

Washington D.C. currently has the highest minimum wage, at $9.50 per hour, followed by Washington State, whose minimum wage is $9.32.

Some analysts worry that rising healthcare costs are pressuring producers and thinning margins, particularly since the Affordable Care Act has gone into effect.  According to the BLS, health and medical insurance costs fell 0.2% month-over-month in October on a seasonally adjusted basis, and were flat on an unadjusted basis.  Healthcare costs rose 0.8% year-over-year in October for producers.

The largest price rises were in traveler accommodation services (3.6%) and car rentals (4.4%), indicating that more aggressive spending on business travel could increase demand for hotels, car rentals, and business flights around the United States.