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United States Annual Producer Inflation Climbs to 6.5% in October, Below 6.6% Forecast
Producer inflation in the United States (US) reached 6.5% in October, up from 6.3% in September, according to Producer Price Index (PPI) figures released on Friday by the US Bureau of Labor Statistics (BLS). The reading was marginally below the market forecast of 6.6%.
Monthly PPI growth slowed to 0.3%, compared with September's increase of 1.4%, which was revised from 1.3%.
Excluding Food & Energy, the PPI recorded monthly growth of 0.3% and an annual rise of 5%. Both readings were in line with analysts' forecasts.
US Dollar edges lower following producer inflation figures
Following the PPI release, the US Dollar (USD) Index slipped in the initial market reaction. It was last trading at 103.10, down 0.05% on the day.
Inflation explained
The increase in the cost of a representative basket of goods and services is measured by inflation. Headline inflation is generally reported as a percentage change both month-on-month (MoM) and year-on-year (YoY). To calculate core inflation, more volatile components, including food and fuel, are excluded because geopolitical developments and seasonal factors can cause their prices to fluctuate. Economists concentrate on this core measure, which is also the target used by central banks. Their mandate is to maintain inflation at a manageable rate, typically around 2%.
Changes in the prices of a basket of goods and services over time are tracked by the Consumer Price Index (CPI). The measure is generally reported as a percentage change month-on-month (MoM) and year-on-year (YoY). Central banks target core CPI, which strips out volatile food and fuel components. A rise in core CPI above 2% generally leads to higher interest rates, while a fall below 2% usually has the reverse effect. As higher interest rates support a currency, rising inflation typically strengthens it. Falling inflation tends to have the opposite effect.
A country's currency gains value when inflation is high and loses value when inflation is lower, however counter-intuitive that may appear. The explanation lies in the central bank's usual response: raising interest rates to tackle higher inflation. Those higher rates draw in more global capital from investors seeking an attractive return on their money.
Gold historically attracted investors during periods of high inflation because it retained its value. Investors still often seek its safe-haven qualities during severe market turmoil, but most of the time high inflation does not prompt the same response. This is because central banks raise interest rates to bring inflation under control. For Gold, higher interest rates are a negative: they raise the opportunity cost of holding the metal rather than an interest-bearing asset or money in a cash deposit account. Lower inflation, by contrast, tends to support Gold because it brings interest rates down and makes the precious metal a more viable investment alternative.
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