Wholesale inflation just had its largest monthly drop in 2.5 years: ‘We got more Goldilocks today’

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After months and months of stubborn inflation crushing the mood of investors and consumers alike, government data show prices may finally be stabilizing. Wholesale prices fell sharply in October, their largest monthly decline since COVID-19 forced travel restrictions and business closures in April 2020. 

Wall Street was quick to celebrate the news, with many arguing it’s another sign that the Federal Reserve’s 20-month-long interest rate hiking campaign is slowly taming inflation. “We got more Goldilocks today,” David Russell, global head of market strategy at TradeStation, said of the data. 

The producer price index (PPI), which measures wholesale prices for businesses, fell 0.5% in October, the Bureau of Labor Statistics reported Wednesday. That was well short of Wall Street’s consensus expectations for a 0.1% jump in the index, and a sharp drop from September’s 0.4% rise. 

The dip in wholesale prices in October brought the year-over-year PPI inflation rate down to just 1.3% as well, compared to 8.2% a year ago. And core PPI inflation, which excludes more volatile food and energy prices, also went unchanged last month versus consensus expectations for a 0.3% rise.

“October’s PPI data came in lower than anticipated, with both headline and core inflation exhibiting the downward trajectory strongly desired by Wall Street, Main Street and, importantly, the Fed,” Greg Bassuk, CEO at AXS Investments, said.

Wholesale price changes offer a preview of consumer prices

The drop in wholesale price inflation is good news for consumers because they often bear the brunt of the pain when businesses face higher costs. As the Richmond Federal Reserve explained in a 2022 article, over the long term, consumer price inflation and wholesale price inflation “move together.”

The latest PPI data also follows a cooler-than-expected consumer price index (CPI) inflation report on Tuesday, which led the stock market to surge. The two inflation reports should enable Fed officials to lower interest rates in 2024, Bassuk said, paving the way for a so-called soft landing—when inflation fades without sparking a recession.

After years of recession forecasts, TradeStation’s Russell also believes that the worst case scenarios are now behind us. He noted that inflation is fading at the same time as retail sales beat Wall Street’s forecasts, falling just 0.1% compared to the expected 0.3% in October. That’s further evidence of the gentle cooling in the economy the Fed has been hoping to achieve, according to many on Wall Street.

Importantly, cooling on the price front isn’t chilling other parts of the economy. The Empire State Manufacturing Survey—which measures manufacturing activity in New York state and is seen as a proxy for the health of the broader U.S. manufacturing industry—climbed 14 points in October. It could be a sign that the many sectors of the economy continue to power through higher interest rates despite consistent recession predictions. “The soft landing is taking shape,” Russell said. 

‘The only logical direction for stocks is higher’

For investors, the PPI report is great news. After surging nearly 2% on Tuesday due to the cool CPI report, the S&P 500 continued to rise Wednesday, jumping 0.31% by midday. “Inflation—for now —is coming back down and the economy—for now—continues to grow at a robust pace, so the only logical direction for stocks is higher,” Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said.

Zaccarelli warned that high interest rates, fading consumer savings, and rising credit card balances are all signs that the economy still faces the prospect of recession. “It would be naïve to assume that a recession can be forestalled forever,” he said. 

However, the Wall Street veteran argued that investors’ sentiment has become so negative this year that even “less worse than feared data,” like the latest inflation reports, could end up sparking a big run in stocks—“a race higher into year end.”

AXS Investments’ Bassuk agreed with the sentiment. “The latest inflation reports delivered an early holiday present for investors who have been skittish about interest rate uncertainty for the balance of 2023,” he said, arguing that 2024 has “robust prospects for market growth.”

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