US producer inflation subsides as energy, food prices fall
US producer prices fell more than expected in May as the costs of energy goods and food declined, signalling that inflation pressures were abating throughout the economy and could eventually provide relief to consumers.
The report from the Labor Department on Wednesday (Jun 14) also showed the annual increase in producer inflation last month was the smallest in nearly 2-1/2 years. Underlying producer prices were muted, strengthening the case for the Federal Reserve to skip raising interest rates on Wednesday.
It followed on the heels of data on Tuesday showing consumer prices edging up in May, with the year-on-year increase the smallest since March 2021.
Fed officials are expected to keep rates unchanged at the end of their two-day meeting on Wednesday, for the first time since March 2022 when the US central bank embarked on its fastest monetary policy tightening campaign in more than 40 years.
“There aren’t as many factory price increases in the pipeline waiting in ambush for consumers and that spells relief for the inflation-weary American public,” said Christopher Rupkey, chief economist at FWDBONDS in New York.
“Inflation isn’t finished wreaking its havoc on the economy yet, but we can see the day is coming when inflation will come down to more manageable levels after the pandemic demand surge completely dissipates.”
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
The producer price index for final demand dropped 0.3 per cent last month after rising by an unrevised 0.2 per cent in April. The PPI has now declined in three of the last five months. A 1.6 per cent plunge in prices for goods, the largest decrease since last July, accounted for much of the drop in the PPI.
Goods prices, which rose 0.2 per cent in April, were last month depressed by a 6.8 per cent tumble in energy prices. Petrol prices plummeted 13.8 per cent, accounting for 60 per cent of the decrease in goods prices. Food prices fell 1.3 per cent, declining for a second straight month as eggs and vegetables cost less.
Food commodity prices have dropped back to levels seen prior to Russia’s invasion of Ukraine in February 2022.
The cost of services rose 0.2 per cent after advancing 0.3 per cent in April, driven by margins for automobiles and parts retailing. There were also increases in fuels and lubricants retailing as well as apparel, footwear and accessories retailing.
Fees for securities brokerage, dealing, investment advice and related services rose. But the cost of transporting freight by road fell 2.1 per cent and portfolio management fees dropped 2.9 per cent. Airline fare prices decreased 1.1 per cent.
These services components feed into the calculation of the Personal Consumption Expenditures (PCE) price indexes, the inflation measures tracked by the Fed for its 2 per cent target.
In the 12 months through May, the PPI climbed 1.1 per cent. That was the smallest year-on-year rise since December 2020 and followed a 2.3 per cent increase in April.
Inflation is subsiding as supply chain bottlenecks disappear and demand for goods slows in response to higher borrowing costs. Last year’s surge in prices is also dropping out of the calculation of annual inflation.
Economists polled by Reuters had forecast the PPI dipping 0.1 per cent from the prior month and rising 1.5 per cent on year.
Economy resilient
Stocks on Wall Street were subdued as investors awaited the Fed’s rate decision and statement. The US dollar fell against a basket of currencies. US Treasury prices rose.
The Fed, which has hiked its policy rate by 500 basis points in this tightening cycle, was seen leaving the door open to further rate increases given the economy’s resilience, particularly the labour market.
Excluding the volatile food and energy components, the so-called core goods prices edged up 0.1 per cent last month, matching April’s gain. This supports expectations that the economy could experience a period of consumer goods disinflation if not outright deflation. But some economists were sceptical.
“We will continue to watch core goods prices for signs that easing input costs could be passed on to lower prices, although this might be unlikely as consumers have become accustomed to higher price levels,” said Veronica Clark, an economist at Citigroup in New York.
The narrower measure of core PPI, which strips out food, energy and trade services components, was unchanged after inching up 0.1 per cent in April. In the 12 months through May, the core PPI rose 2.8 per cent after increasing 3.3 per cent in April.
With the CPI and PPI data in hand, economists estimated that the core PCE price index rose 0.3 per cent in May after increasing 0.4 per cent in April. The core PCE price index was forecast advancing 4.6 per cent year-on-year in May after rising 4.7 per cent in April. The data will be published at the end of the month.
“Solidly cool producer price inflation means one less thing for the Fed to worry about, but it’s not sufficient evidence that consumer price inflation is on its way to a satisfactory level,” said Will Compernolle, macro strategist at FHN Financial in New York. “The tight labour market is reinforcing consumer price increases in services.” REUTERS
Share with us your feedback on BT's products and services
