Analysts at Nomura note that the US PPI rose by 0.4% m-o-m in January, matching the market consensus, but excluding volatile energy, food and trade services prices, “core” PPI showed a strong increase of 0.4% m-o-m, the highest reading since April 2017.

Key Quotes

“Processed and unprocessed intermediate goods prices excluding food and energy continued to increase steadily by 0.3% m-o-m and 3.8% m-o-m, respectively. Pipeline inflation for domestically produced goods has been building gradually.”

“Importantly, among the elements relevant for core PCE price, the price indices for hospital, home healthcare and nursing care facility services all increased relatively strongly, suggesting that health care prices will likely push up core PCE inflation in January. Incorporating the detailed components of PPI data, we now expect the core PCE price index to increase by 0.3% (0.284%) m-o-m, which would translate into a y-o-y change of 1.5% (1.525%). This is higher than our previous estimate of a 0.241% m-o-m increase. Both CPI and PPI for January were positive to core PCE inflation.”

“GDP tracking update:

Unexpected strength in utilities output, as reported in the January industrial production report, suggested more personal spending on utility services. This led us to raise our estimate of January PCE. However, stronger-than-expected increases in PPI components relevant to core PCE price indicated stronger aggregate and core PCE prices in January, implying less growth in real PCE.

Moreover, auto assemblies in January were stronger than we expected, suggesting auto inventory accumulation likely exceeded our expectations. However, incoming PPI indices which we use to deflate investment in home improvement and residential brokers’ commissions were well above our expectations and lowered our estimate of real residential investment. On balance, the impact of today’s data on our Q1 real GDP growth tracking was negative. After rounding, we left our estimate unchanged at 2.0% q-o-q saar.”