Inflation pressure cools, but trucking rates keep climbing

Data on producer prices shows that overall inflation pressure calmed further in December, weighed down again by declines in energy prices. Industry detail showed that trucking rates continued to surge, however, driven by another large gain in long-distance trucking rates.

The Bureau of Labor Statistics reported that the producer price index (PPI) fell 0.2 percent in December from November’s levels. This fell short of consensus estimates of a 0.1 percent decline and follows a modest 0.1 percent gain in the previous month. Year-over-year wholesale inflation remained subdued at 2.5 percent, down from the multi-year highs set earlier in 2018.

 Core wholesale inflation has cooled off in recent months
Core wholesale inflation has cooled off in recent months

As was the case in last month’s results, price gains in December were restrained by falling energy prices, which tumbled by 5.0 percent during the month. The so called “core PPI,” excluding the volatile food, energy, and trade service components, was unchanged in December and remained 2.8 percent higher than at this point last year.

Market watchers and policymakers typically use the PPI to gain some insight into what the underlying pressures of inflation are in the economy. The PPI measures the prices that businesses receive for the goods and services that they provide, and is often seen as a bellwether of upcoming increases in consumer prices.

Trends in inflation have taken on some additional significance over the past several months because of their implications on monetary policy going forward. The Federal Reserve has recently said that it will slow the pace of interest rate hikes in 2019, but maintains that the future course of monetary policy depends heavily on results from the labor market and inflation. Today’s results, combined with the small gain in November, suggest that overall inflation pressure is easing in the economy, making the Fed’s decision to slow down rate increases an easy one.

Trucking rates climb, led by gains in long distance trucking

Industry detail in this morning’s release showed that the trucking industry continued to see rapid price increases, despite the softer overall inflation environment. Producer prices for General Freight Trucking rose 0.6 percent in December on the heels of another 1.3 percent gain in the previous month. This pace has been enough to keep year-over-year rate inflation at or above 8.0 percent in recent months, registering 8.0 percent in December despite increasingly tough comparisons to last year.

 Rate increases in long-distance trucking remain strong
Rate increases in long-distance trucking remain strong

Gains during the month were almost entirely driven by long-distance truckload services, which posted a third consecutive monthly gain above 1 percent with a 1.3 percent gain in December. Long-distance less-than-truckload (LTL) and local trucking rates both experienced declines during the month, though year-over-year growth held relatively stable relative to recent performance at 9.8 percent and 4.7 percent, respectively.

Behind the Numbers:

It seems like only yesterday that the concern was an economy that was potentially overheating and the Fed was feeling pressure to continue to increase rates consistently throughout 2019. Recent economic results suggest that the pace of growth has slowed considerably, which has removed some of the concerns that inflation would begin to accelerate. Given the many statements by Fed officials over the past month, including Chairman Powell’s interview last week, two additional rate increases in 2019 seems like a maximum and the likelihood of no rate hikes at all this year has gotten higher.

Interestingly enough, none of this softness has appeared to spill over into the trucking industry yet, especially on the long-distance side. There are a number of indicators that suggest that the growth of freight flowing through the economy slowed quite a bit, and the pace of hiring within trucking points to expanding capacity in the industry. Still, the PPI data would suggest that long-distance carriers still retain some pricing power in this environment. Year-over-year rate inflation is down from the multi-year highs seen in July 2018 and these supply and demand factors will likely take hold on rates at some point, but for now the pace of rate increases is still well above average.

Ibrahiim Bayaan is FreightWaves’ Chief Economist. He writes regularly on all aspects of the economy and provides context with original research and analytics on freight market trends. Never miss his commentary by subscribing.