Producer prices rise 9.7%, Fed’s Brainard says controlling inflation is top priority

Yahoo Finance's Brian Cheung breaks down the latest Producer Price Index data for December and how the Fed is responding to rising inflation

Video Transcript

JULIE HYMAN: Let's talk about inflation more broadly, including the producer price numbers that we got today. Brian Cheung is with us now. Like CPI, PPI came in largely as expected, right, Brian? But talk us through the numbers.

BRIAN CHEUNG: It came in as expected. But, as you were kind of pointing out, interesting to see whether or not there's going to be a rotation from goods purchases to services purchases. And we're actually already starting to see the trend of that from the producer price index numbers that we had gotten just about 30 minutes ago now.

The Bureau of Labor statistics said that on a headline basis, producer prices increased by 2/10 of a percent in December. That's a notable deceleration from the 1% that we had seen in November. But it's interesting to see, again, the rotation within the types of purchases that were made, a final demand goods actually decreased by 4/10 of a percent in the month of December. But final demand services increased by 0.5%.

So, actually, you're starting to see some of these services providers who have continued to see reduced demand through most of this recovery start to be able to uptick their prices a little bit more, which shows that people might be rotating the way that they're spending from goods into services. Now, of course, this doesn't mean that inflationary pressures are going to abate because of that report. It's still very much in line with what the expectations were.

Also, consider the survey of many CEOs around the world that say they expect inflation to hang around for quite a while. The Conference Board had some statistics showing that, actually, almost 60% of CEOs around the world expect inflation to last until mid-2023 or even beyond 2023, showing that some of the arguments that we've heard from Federal Reserve officials, perhaps, that inflationary pressures could abate by the end of 2022 might not be the expectation, at least in the C-suites around the world. That could definitely be something to watch as we look forward to ECE, CPI, all of the different types of inflation readings in the months to come.

BRIAN SOZZI: And Brian, we had a lot of Fed speak this week. And, increasingly, it appears they all-- all officials appear to be singing from the same hymn sheet. What are you hearing?

BRIAN CHEUNG: Yeah, absolutely. I mean, the chorus of Fed officials, if you will, is very much kind of in tune, and they're all hawkish. The question is, who's more hawkish than the other, right?

You have the likes of Esther George from Kansas City and James Bullard from the St. Louis Fed, who, by the way, very important because both of them are FOMC voters this year, already talking about how they would prefer to approach balance sheet roll off. Keep in mind the Fed's not doing that right now. Their balance sheet is still growing. They're still adding assets to their program. But they plan on ending that in March. And it seems like maybe Fed officials can move fairly quickly after that to start letting the balance sheet run off.

But the latest commentary that we had heard was from Philadelphia Fed president Patrick Harker, who spoke earlier this morning. He said inflation is, quote, "more persistent and higher than any of us want to see" and said he's concerned about inflation expectations becoming unanchored-- translation, worried about it possibly becoming runaway inflation. He doesn't say that's the case right now. But that concern is kind of underscoring how he would favor multiple interest rate hikes this year.

And then, later on, around 10:00 AM, we're gonna hear from Fed vice chair nominee Lael Brainard. She's testifying to the Senate Banking Committee after being tapped by the Biden administration to serve in the number two role. Again, we have to rewind. That announcement came in November of last year.

Brainard is seen mostly as a dove. But, in her prepared remarks to the committee, she said inflation, quote, "is too high," putting it quite frankly there. And then, she also said later on that this is our most important task, taming inflation. So she's very much going to hit on that point in her testimony again today.

She's also expected to pass, very much like Jerome Powell, on a bipartisan basis. So it seems like this confirmation hearing will also be an opportunity for the committee to kind of pick her brain as opposed to vet her credentials. She's already been Senate-confirmed before. But, of course, that will kick off at 10:00 AM today, and we'll have the full coverage of all that right here on Yahoo Finance.

JULIE HYMAN: It's been interesting, Brian, watching what's been happening in bond yields as we talked about this a little bit yesterday, that we have seen this move upward now on these expectations that the Fed is indeed gonna raise multiple times this year, perhaps even starting in March. That seems to be more-- I mean, if not consensus, it's becoming maybe a little bit more of the accepted view.

And what's interesting to me is this is as we hear multiple economists saying inflation is gonna slow after a couple more months of really hot prints here. Now, they could be wrong. They were wrong last year, in large part, in expecting a slowdown in inflation. But it is interesting that we could actually end up seeing a coinciding rate increases with a slowdown in inflation that's happening anyway in the economy, right?

BRIAN CHEUNG: Yeah, certainly. And I think that the other dark horse that we have to think about here, and I think actually the more impactful one, is going to be the Federal Reserve's approach to balance sheet roll off as well. I mean, yes, inflation, if you're adjusting for these nominal yields, is going to be a negative even after the Fed starts hiking.

But you take a look at the 10-year that's been kind of finding some resistance as of late around the 175-basis-point level. Well, you're kind of wondering, that might be doubting the Federal Reserve's ability to raise interest rates more than about seven or eight times. And our very own Brian Sozzi wrote about how Goldman Sachs is calling for perhaps 10 interest rate hikes over the next few years. And, if that does happen, could that invert the yield curve, which could be a bellwether for a possible recession?

Now, the question, though, is whether or not the bond markets, especially the long bond, are pricing in what the Fed's strategy is with allowing their balance sheet holdings of the treasuries themselves-- in many cases, long bond treasuries, also-- to roll off the balance sheet. And that's where we don't know.

We already know the messaging from the Fed that they are intent on raising interest rates. So that's already priced in. But we have no clarity about how the Fed is going to approach allowing its $9 trillion holdings of US treasuries and agency mortgage-backed securities to roll off. That duration change, when they do start that process, could very much be impactful.

So, when the Fed starts to get more clues, I would expect bond movements, especially on the longer end of the curve, to move a bit more volatile. And I think that's gonna be very interesting to see to where, you know, sentiment is, as based on the yield curve. But, of course, we need to wait for more Fed commentary before we start to see and read into the tea leaves there.

BRIAN SOZZI: Brian, you're a Fed expert. You like my framing on that story, right? You like how I got that nice round 10 into the headline, right?

BRIAN CHEUNG: You know, you're just-- you're a master of verbs, Brian, master of verbs.

JULIE HYMAN: Well, I'm glad that we're all on the same page here with our admiration for Brian Sozzi. Let's take a quick break. Thanks so much, Brian Cheung.