• While the headline and core January PPI readings were firm at 0.5% and 0.4%, respectively…
• … the components most relevant for our core PCE tracker were generally softer, and we now see a 0.24%m/m (2.5%oyu) rise in January
• PPI food and energy showed some expected firmness, while core PPI goods prices rose 0.1% last month

While the January final goods producer price index (PPI) represented another upside surprise to consensus forecasts for inflation last month, it was more closely aligned with our own forecast for firming. More importantly, the key components that feed into our core PCE tracking model were uniformly soft (once seasonally adjusted to match the construction of core PCE—the source data from the PPI are reported as NSA), reinforcing our below-consensus tracking estimate. Taking on board the information from the latest PPI and CPI reports, we are now tracking a 0.24% rise in the January core PCE deflator. If realized, this would translate to a deceleration of year-ago core PCE inflation to 2.5% from 2.8% in December.

Part of this slowing reflects base effects, but the leading edge of core PCE inflation prints have stepped down since late spring last year. While the six-month annualized run rate for January is up a tenth to 2.4%, last June it had peaked at 3.3%. Our tracking estimate suggests a three-month annualized run rate of 2.0% for January. While the Fed is not likely to declare victory on these numbers and quickly resume cutting, if this broad trend continues Fed officials would likely see scope for further removal of policy restriction later this year.

Our tracking estimate also highlights a growing gap between CPI and PCE measures of inflation, which is something Fed officials will need to navigate in their communication. There are differences in both weights and scope between the two series—for example, the big move in used cars prices in the January core CPI will have less than half the impact on core PCE given the latter’s smaller weight—in addition to an on-average lower pace of PCE inflation as the basket is not fixed as it is with the CPI. That tends to miss some substitution by consumers to similar goods (and thus the CPI slightly overstates inflation).

Returning to today’s PPI release, headline rose 0.4% (0.400% to three decimals) and ex. food and energy core was up 0.3% (0.277%). Note that December received fairly sizable upward revisions in this release, with the monthly change to headline index at 0.5% from 0.2% originally, and core at 0.4% from flat originally. Overall that helped lift the recent profile for PPI inflation, even as November was revised down slightly: relative to the December report, year-ago inflation for headline PPI ticked up to 3.5%, while for core rose to 3.5% from 3.3% originally in Dec.

In the details, food (up 1.1%) and energy (up 1.7%) boosted headline PPI relative to core, broadly as expected. Core goods was up only 0.1%, which leans against potential pressure from front-loading demand and output ahead of tariffs. The 0.3% rise in services PPI was due to a 0.6% rise in trade and warehousing costs.