Wholesale prices fell 0.5 in December, outpacing an expected decline of 0.1 percent, as inflation continues its six-month downward slide.
On an annual basis, wholesale prices dropped to 6.2 percent in December from 7.3 percent in November, the largest month-to-month drop since prices started falling in June, according to producer price index (PPI) data released Wednesday.
Economists had been expecting an annual increase of 6.8 percent, making for a downside surprise of 60 basis points.
Taking out the particularly volatile categories of food and energy, which are subject to a wider range of international pressures, core PPI fell to 4.6 percent in December from 4.9 percent the previous month.
The PPI measures the prices that businesses pay to each other before they reach consumers on retail markets. The current bout of inflation, which started in 2020 after the economy shut down, was initially caused by supply disruptions, so falling wholesale prices are a good sign that decreasing inflation looks set to continue.
The drop is attributable to a 1.6 percent decline in prices for goods, while the index for services rose 0.1 percent.
The sharpest monthly price declines for individual goods were seen in a 9.4 percent drop in fresh and dry vegetables, a 13.4 percent drop in gasoline, a 27 percent drop in No. 2 diesel fuel and a 5.9 percent drop in grains. Those are seasonally adjusted single month percent changes.
On the flip side, wholesale prices of fresh eggs have still been soaring, up 25 percent from November to December. Iron and steel scrap metal are also higher, seeing an 8.3 percent monthly increase.
Consumer-side inflation has also been falling in recent months, declining 0.1 percent in December to land at 6.5 percent annually. That’s off a high of 9.1 percent in the middle of last year.
Inflation has been falling as the Federal Reserve has been cranking up interest rates, which rose from zero percent to 4 percent over the course of 2022. Higher interest rates make it more expensive to transact throughout the economy, bringing down demand and prices along with it.
But precipitously falling inflation has also reawakened a set of arguments that inflation in the wake of the pandemic was actually a temporary phenomenon and not indicative of deeper structural problems in the economy. These arguments have been bolstered by the fact that the job market has stayed hot and employment levels high while prices have been coming down — a seeming contradiction for many economists.
“This supports what many of us had said last year, the inflation was temporary, attributable to supply shocks from the pandemic closures and then the war in Ukraine,” economist Dean Baker of the Center for Economic Policy and Research, a think tank, said in a statement to The Hill. “With the economy reopening, most of the impact of the supply shocks is being reversed, with many of the items that had seen the sharpest price increases now seeing deflation.”