Wholesale prices unexpectedly surged in June, marking the highest increase since March 2023, according to new data released Friday.
This spike in the Producer Price Index (PPI) raises questions about the ongoing battle against high inflation, especially coming a day after the Bureau of Labor Statistics (BLS) reported the first monthly drop in consumer prices in four years.
However, economists advise caution, noting that monthly data can be erratic. The sharp rise in PPI, driven by a 1.9% increase in trade services margins, might not signal broader inflation pressures.
Ian Shepherdson, chairman and chief economist at Pantheon Macroeconomics, highlighted the volatility of the data.
“The increase was broad-based among wholesalers and retailers of fuel, autos and other goods, but almost certainly is not the start of a resurgence in margins,” he noted.
Economists had forecasted a modest 0.1% monthly increase, with an annual rate holding steady at 2.2%.
Decoding the Core Core
PPI is often seen as a precursor to retail-level inflation. Rising margins might suggest business greed, but Chris Rupkey, chief economist at FwdBonds, believes this isn’t the case.
“It does not sound good, but we don’t think consumers are getting ready to be hit by a new surge in price increases just because margins are going up,” Rupkey explained, emphasizing the difficulty in measuring these margins.
Excluding energy and food, core PPI rose 0.4% for the month and 3% annually, its highest rate since April 2023. Economists also analyze a “core core” reading, which strips out energy, food, and trade services to eliminate volatility.
In June, this measure was flat month-over-month and slowed to 3.1% annually from 3.3% in May.
Inflation’s Downward Trend
Despite the PPI spike, overall inflation has been cooling. June’s Consumer Price Index (CPI) showed prices dropping monthly for the first time since May 2020, with annual inflation slowing to 3%, the lowest since June 2023.
Rupkey remains optimistic, predicting that core Personal Consumption Expenditures (PCE) inflation for June will likely remain unchanged or increase modestly by 0.1%.
“Inflation still looks to be dying on the vine in large part because commodities and goods price increases have moderated,” he said.
The Federal Reserve’s 2% target is based on the headline PCE index, with a keen eye on core PCE for underlying trends.
Kurt Rankin, senior economist at PNC Financial Services, pointed to falling prices in energy-heavy transportation and warehousing as a sign of easing supply-side pressures.
“The downward-trending energy PPI pace, which lies at the root of all price pressures in the US economy, implies that the second half of 2024 will see diminishing cost pressures from producers’ own energy bills, as well as the cost of shipping goods to retailers,” Rankin wrote.
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