U.S. PPI Exceeds Expectations in November, but Rate Cut Expectations Remain Unchanged

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The U.S. Producer Price Index (PPI) for November significantly surpassed market expectations, further solidifying the Federal Reserve’s (Fed) anticipated narrower rate cut path for 2025. Additionally, the same day’s report on initial jobless claims showed an increase that exceeded market forecasts, aligning with recent signs of labor market cooling.

Following the release of these data, all three major U.S. stock indices closed lower, with the Dow Jones Industrial Average marking its sixth consecutive decline. Meanwhile, the yield on the 10-year U.S. Treasury note continued to climb.

 

PPI Exceeds Expectations

The U.S. Producer Price Index (PPI) for November rose by 3.0% year-on-year (previously 2.6%), marking the second consecutive month of acceleration, according to  U.S. Bureau of Labor Statistics on December 12.

On a monthly basis, the PPI increased by 0.4% (previously 0.3%), exceeding market expectations of 0.2% and hitting a six-month high. Core PPI, which excludes volatile food and energy prices, rose by 3.5% year-on-year (previously 3.4%) and by 0.2% month-on-month (previously 0.3%).

The increase in PPI was primarily driven by a 0.7% rise in final demand goods (previously 0.1%), with food prices surging by 3.1% month-on-month (previously 0.0%), contributing to nearly 80% of the total increase in final demand goods. Other categories of goods showed minimal changes month-on-month.

Conversely, final demand services prices declined for the fourth consecutive month, rising only 0.2% (previously 0.3%). Key components of the Federal Reserve’s preferred Personal Consumption Expenditures (PCE) price index, such as outpatient care (0.0%, previously 0.4%), nursing home care (0.1%, previously 0.8%), airfare (-2.1%, previously 2.6%), and asset management services (-0.6%, previously 3.1%), all recorded declines.

Unemployment Claims Reflect a Cooling Labor Market

The jobless claims data showed that initial claims for unemployment benefits rose to 242,000 in the previous week, up 17,000 from a revised 225,000, returning to levels seen two months ago. The four-week moving average increased to 224,250 from a revised 218,500, up by 5,750.

 

Continuing claims for unemployment benefits rose by 15,000 to 1,886,000, maintaining a near three-year high. These figures align with the upward trend in unemployment reported for November but may partially reflect seasonal effects associated with the Thanksgiving holiday.

Overall, the rise in PPI was primarily attributed to the sharp increase in volatile food prices, while PCE-related service prices continued to show signs of deceleration. However, changes in trade tariffs and immigration policies could potentially reduce the downward momentum in goods prices, slowing the pace of overall inflation deceleration.

Meanwhile, the labor market continues to show signs of cooling, reinforcing expectations for the Federal Reserve to proceed with a December rate cut. Nevertheless, the path for rate cuts in 2025 remains constrained, with markets anticipating a narrower scope for easing. U.S. 10-year Treasury yields rose by 5.5 basis points to approximately 4.33%, while all three major U.S. stock indices closed lower.