Producer prices unexpectedly fell 0.5 percent in October after rising 0.4 percent in September, the largest decrease since April 2020, bringing down the 12-month rate to 1.3 percent from 2.2 percent. Both readings were below even the lowest forecasts of flat prices on the month and a 1.9 percent increase year-over-year in an Econoday survey. Excluding foods and energy, prices were also lower than anticipated, with the index unchanged on the month and up 2.4 percent from a year earlier. The core index, which also excludes trade services, edged up 0.1 percent on the month after increasing 0.3 percent in September, for a 2.9 percent 12-month advance, a slowdown from 3.0 percent in September.

Today's report comes on the back of easing inflationary pressures at the retail level as evidenced by flat consumer prices in October, bringing down the 12-month inflation rate to 3.2 percent from 3.7 percent. Core CPI, excluding food and energy, rose 0.2 percent on the month and 4.0 percent year-over-year, the lowest 12-month rate since September 2021. Overall, the two sets of inflation data increase the odds of maintaining rates unchanged in the near future, although the Fed will want to see a further slowdown in core inflation data over the coming months. With the latest indicators, Econoday's Relative Performance Index is currently consistent with an economy that is slightly underperforming.

Prices for final demand goods fell 1.4 percent in October, the first decline since May, led by a 6.5 percent drop in energy. Food was down 0.2 percent. Goods prices fell 1.1 percent year-over-year.

Services prices were unchanged on the month and up 2.6 percent year-over-year, down from 2.9 percent in September. Over the month, transportation and warehousing services prices rose 1.5 percent.

Producer prices in October are expected to edge 0.1 percent higher on the month versus a 0.5 percent increase in September. The annual rate in October is seen at 2.0 percent versus September's 2.2 percent increase. October's ex-food ex-energy rate is seen rising 0.3 percent on the month.

The Producer Price Index (PPI) of the Bureau of Labor Statistics (BLS) is a family of indexes that measures the average change over time in the prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. Effective with the January 2014 PPI data release in February 2014, BLS transitioned from the Stage of Processing (SOP) to the Final Demand-Intermediate Demand (FD-ID) aggregation system. The headline PPI (for Final Demand) measures price changes for goods, services, and construction sold to final demand: personal consumption, capital investment, government purchases, and exports.

The PPI measures prices at the producer level before they are passed along to final consumers. A portion of the inflation at the producer level gets passed through to the consumer price index (CPI). By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months.

While the CPI is the price index with the most impact in setting interest rates, the PPI provides significant information earlier in the production process. As a starting point, interest rates have an"inflation premium" and components for risk factors. A lender will want the money paid back from a loan to at least have the same purchasing power as when loaned. The interest rate at a minimum equals the inflation rate to maintain purchasing power and this generally is based on the CPI. Changes in inflation lead to changes in interest rates and, in turn, in equity prices.

The PPI comes in two key main versions: final demand (FD) and intermediate demand (ID). The final demand portion is composed of six main price indexes: final demand goods; final demand trade services; final demand transportation and warehousing services; final demand services less trade, transportation, and warehousing; final demand construction; and overall final demand.

The intermediate demand portion of the FD-ID system tracks price changes for goods, services, and construction products sold to businesses as inputs to production, excluding capital investment. There are two parallel treatments of intermediate demand, each constructed from the identical set of commodity price indexes. The first treatment organizes commodities according to commodity type, and the second organizes commodities using a stage-based, production flow model.

The PPI is considered a precursor of both consumer price inflation and profits. If the prices paid to producers increase, businesses are faced with either charging higher prices or taking a cut in profits. The ability to pass along price increases depends on the strength and competitiveness of the marketplace.

Under the prior PPI system, the producer price index was substantially more volatile than the consumer price index because the CPI included services while the PPI did not. Volatility has been reduced substantially in the PPI-FD due to the inclusion of services but the PPI still is more volatile than the CPI. Wages are a bigger share of the costs at the retail level than at the producer level and this plays a role in the CPI’s lower volatility. Also, the PPI does not include owners’ equivalent rent—a large and slow moving component in the CPI. Food and energy prices are major sources of volatility in the PPI, hence, the greater focus on the"core PPI" which excludes these two components.

The bond market rallies when the PPI decreases or posts only small increases, but bond prices fall when the PPI posts larger-than-expected gains. The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.