Wholesale prices fell 0.5% in October for the biggest monthly drop since April 2020

Groceries are offered for sale at a supermarket on August 9, 2023 in Chicago, Illinois.

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Wholesale prices in October showed the biggest drop in 3½ years, providing another indication that the worst of the inflationary surge may be over.

The producer price index, which measures businesses’ final demand costs, fell 0.5% for the month, against expectations for a 0.1% gain from the Dow Jones consensus, the Labor Department reported on Wednesday. The department said it was the biggest monthly decline since April 2020.

On an annual basis, headline PPI rose 1.3%, down from 2.2% in September.

Excluding food and energy, core PPI was unchanged, also below the forecast for a 0.3% increase. Excluding food, energy and trade services, the index rose 0.1 per cent.

The report comes a day after the Labor Department said the consumer price index, which measures the prices of goods and services at the consumer level, was unchanged in October from the previous month. That set off an aggressive rally on Wall Street, where sentiment is rising that the Federal Reserve is done raising interest rates and may actually start cutting in the first half of 2024.

However, consumers showed some price sensitivity in October.

The Commerce Department’s advance retail sales report for the month showed a 0.1% drop, according to a figure adjusted for seasonal factors but not inflation. Wall Street had been looking for a 0.2 percent drop. Excluding cars, sales rose 0.1% compared to expectations for an unchanged number.

Price falls came primarily from the commodity side, as the index fell 1.4% according to the PPI report. Final prices for demand services were unchanged. A surge in commodity prices caused by outsized demand for big-ticket items in the early days of the Covid pandemic helped fuel the rise in inflation.

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About 80% of the drop in commodity prices came from a 15.3% drop in gasoline prices, the Labor Department said.

On the services side, transport and storage costs rose 1.5%, while trade services fell 0.7%. Prices for air passenger services rose 3.1 per cent.

From a consumer perspective, sales were also held back by the drop in gasoline prices, with gas station sales down 0.3%, the Commerce Department reported. Motor vehicle and parts retailers saw a 1% drop, while furniture and home stores reported a 2% drop. Both food and beverage and electronics and white goods stores showed increases of 0.6%.

The control group of retail sales, which the Commerce Department uses to calculate gross domestic product, showed a 0.2% increase.

Equity market futures were positive after the report, while government yields were also higher.

In other economic news, the Empire State Manufacturing Survey, which measures conditions in the New York area, posted an unexpected increase of 14 points to 9.1, better than the estimate for a -3 reading. The number represents the percentage of businesses seeing expansion versus contraction, so any positive number indicates growth.

The report from the New York Federal Reserve showed gains in inventories and shipments, while indexes for employment, prices and unfilled orders fell.

Correction: In October, wholesale prices were the biggest drop in 3½ years. An earlier version had the time frame wrong.