What 7.4% PPI Inflation Means For Investors: 'It Is Likely The Fed Will Move Ahead With Their Plans'

The SPDR S&P 500 ETF Trust SPY traded lower Friday after the U.S. Labor Department reported a 7.4% increase in the producer price index in the month of November, outpacing economist expectations.

The PPI climbed 0.3% compared to October, exceeding the 0.2% monthly increase economists had expected. The 7.4% year-over-year growth in November is down from a peak of 11.7% in March, its highest growth since at least 2010.

To calculate the CPI, the Bureau of Labor Statistics estimates what "urban consumers" spend out of their own pockets. It relies on the Census Bureau's Consumer Expenditure Survey and then samples roughly 23,000 stores and 50,000 landlords to determine product and rent prices.

Related Link: 'Eye-Popping For The Fed': 5 Experts React To November Jobs Report, What It Means For Interest Rates

So-called core PPI, which excludes food, energy and trade services, was up 6.2% in November, down from a 6.6% gain in October.

The latest PPI numbers come after the labor department reported a 7.7% increase in the consumer price index in the month of October, down from a peak of 9.1% in June.

The Federal Reserve is likely closely monitoring both key inflation levels ahead of its highly anticipated December meeting.

Voices From The Street: Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said the November CPI reading expected out on Dec. 13 will be the last inflation data point before the Fed completes its final meeting of the year on Dec. 14, making it particularly important.

"It is likely that the Fed will move ahead with their plans of reducing the rate hike down from 75 bps per meeting to 50 bps per meeting, but if there is any chance of a Santa Claus rally this year, it will hinge on the inflation data next Tuesday coming in lower than expected," Zaccarelli said.

Related Link: US Adds 263,000 Jobs In November As Labor Market Stays Hot Despite Fed Hikes

Jeffrey Roach, chief economist for LPL Financial, said the Fed will likely reduce its pace of tightening in December and will continue to do so in the opening months of 2023.

"However, the monthly increase in producer prices illustrates the need for continued tightening, albeit at a slower pace," Roach said.

Gina Bolvin, president of Bolvin Wealth Management Group, said the market weakness on Friday might be a knee-jerk overreaction to the PPI report.

"I don’t think this morning’s higher than expected number will impact the Fed’s decision on Wednesday and we’re focused on seasonality. December is the 2nd best month for the S&P historically," Bolvin said.

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