US producer prices rise at a brisk pace, adding to Fed pressure

Prices paid to US producers surged in May, underscoring persistent inflationary pressures across the economy that are likely to keep the Federal Reserve aggressively raising interest rates.

The producer price index for final demand increased 0.8 per cent from April and 10.8 per cent from a year earlier, Labor Department data showed Tuesday. That followed a 0.4 per cent advance in the prior month.

Nearly two thirds of the May increase was due to an advance in goods prices, especially energy.

Excluding food and energy, the so-called core PPI was up 0.5 per cent in May and rose 8.3 per cent from May 2021.

The figures are the latest indication that inflation will remain higher for longer than most economists - and the Fed - had anticipated earlier. Data released last week showed consumer inflation unexpectedly accelerated to its highest level in four decades in May in a broad-based advance that crushed hopes that inflation was starting to moderate.  

JPMorgan and Wells Fargo are among a number of banks that are now expecting the Fed to raise interest rates by 75 basis points this week, which would be the largest since 1994. The CPI data, as well as recent inflation expectations, have surprised to the upside, likely leading the Fed to consider a hike of that magnitude.

While prices of some commodities have declined from an April peak, broader inflationary pressures don't appear to be resolving any time soon. 

Russia's war in Ukraine continues to roil food and oil supplies globally, and China has started re-imposing Covid-19 restrictions just weeks after loosening them in major cities. The coming expiration of labour contracts for over 22,000 West Coast dockworkers risks further disrupting supply chains. 

Prices of goods climbed 1.4 per cent, driven by a 5 per cent increase in energy. Services prices were up 0.4 per cent from April, after dropping in the prior month. That advance included a 2.9 per cent jump in transportation and warehousing costs.

The median forecasts in a Bloomberg survey of economists called for a 0.8 per cent monthly advance in the overall PPI and a 10.9 per cent year-over-year increase.

The final demand for food index was unchanged from the previous month, restrained by declines in the costs of beef and pork. That could be encouraging for consumer meat prices down the line.

Economists look to some categories in the PPI report to gauge the impact on the personal consumption expenditures price index, which the Fed uses as its preferred inflation metric.

Producer prices excluding food, energy, and trade services - which strips out the most volatile components of the index - rose 0.5 per cent in May and were up 6.8 per cent from a year ago. 

Costs of processed goods for intermediate demand, which reflect prices earlier in the production pipeline, increased 2.3 per cent in May, matching the strongest since October. BLOOMBERG

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