The producer price index fell 0.2% in December after rising 0.1% in November, according to a report from the Labor Department. It was the first decline in U.S. producer prices in more than two years and the largest decrease since August 2016.

The decline was partly due to a sharp drop in energy prices, which fell 5.4% for the month after tumbling by 5% in November. Food prices increased 2.6% following a 1.3% increase in November. Prices for trade and transportation and for warehousing services fell 0.3% and 0.2%, respectively.

“December’s drop in the producer price index was mostly an energy story, but there are signs of underlying price pressures moderating too,” said Michael Pearce, senior U.S. economist, Capital Economics.

The drop in prices could signal the Federal Reserve will be cautious in raising interest rates this year. The Fed’s preferred metric for inflation, the personal consumption expenditures price index (which excludes food and energy), is holding at just below its target of 2%.

Last week, Federal Reserve Chairman Jerome Powell said the central bank was flexible and patient given that inflation was “low and under control” and it could change its policy in response to the condition of the economy. “We’re waiting and watching,” said Powell.

The Fed had forecast two interest rate increases this year.

“We expect the Fed to sit tight until June, and odds are rising that it could be an even longer pause given the absence of an acceleration in inflation, past tightening in financial market conditions, slowing in the global economy, and uncertainty surrounding geopolitical events,” Ryan Sweet, a senior economist at Moody’s Analytics, told Reuters.

For the 12 months ended December, the PPI rose 2.5%, in line with economists’ expectations.

Data on the core PCE index is set to be released later this month.

Photo: Getty Images

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