Producer Prices Unexpectedly Fall as Energy Costs Plunge

An employee restocks meats at a grocery store in North Miami on Jan. 17, 2023. (Wilfredo Lee/AP Photo)

Producer prices—the cost of goods and services paid by businesses—fell in May, suggesting that inflationary pressures might be easing and that the Federal Reserve’s fight to restore price stability has garnered momentum.

The producer price index (PPI) declined 0.2 percent last month from 0.5 percent in April and compared to the consensus estimate of 0.1 percent, according to the Bureau of Labor Statistics. The slowdown follows three straight months of accelerating PPI inflation.

On an annual basis, the PPI eased to a lower-than-expected 2.2 percent from 2.3 percent.

Goods inflation in May slowed by 0.8 percent, while prices for final demand services were flat.

Leading the PPI decline was energy, tumbling by nearly 5 percent.

“Nearly 60 percent of the May decrease in the index for final demand goods can be traced to a 7.1-percent decline in prices for gasoline,” the federal agency said in the report.

Core PPI, which strips out the volatile energy and food sectors, was unchanged in May, down from the 0.5 percent reading in April. The market forecast was 0.3 percent.

On a year-over-year basis, core PPI fell to a slightly slower-than-expected pace of 2.3 percent from 2.4 percent.

Economists pay close attention to the PPI because it can serve as a precursor to future inflation trends, as the monthly report captures what companies are paying for goods and services early in the supply chain. The costs can then be passed on to consumers at the retail level.

The latest inflation reading is positive news for the Federal Reserve and bolsters hope that the central bank could be closer to cutting interest rates.

The consumer price index (CPI) increase in May eased to an annual 3.3 percent from 3.4 percent. Core CPI also dipped to 3.4 percent, down from 3.6 percent.

Import and export prices will be the next notable inflation gauge, to be released on June 21. Import prices are projected to rise by 0.1 percent, and export prices are forecast to be flat.

Market Reaction

There was little reaction to the PPI data in the financial markets, with the leading benchmark indexes mixed in pre-market trading.

U.S. Treasury yields were down slightly. The benchmark 10-year yield tumbled 3 basis points to 4.265 percent. The two-year yield fell below 4.69 percent, and the 30-year yield was little changed at 4.44 percent.

The U.S. Dollar Index, a measurement of the greenback against a basket of currencies, erased most of its gains after the latest inflation figures.

Investors cheered in the middle of the trading week on the softer inflation print and shrugged off the monetary authorities lowering their rate-cut forecasts from three to one in the latest Summary of Economic Projections (SEP).

Fed Chair Jerome Powell, speaking after the numbers were released, assured the public that a rate increase is unlikely.

Federal Reserve Chair Jerome Powell holds a press conference at the end of the Federal Open Market Committee meeting in Washington on May 1, 2024. (Saul Loeb/AFP via Getty Images)

“We welcome today’s reading and hope for more like that,” Mr. Powell told reporters at the post-meeting press conference.

“We think policy is restrictive. And we think, ultimately, that if you just set policy at a restrictive level, eventually you will see real weakening in the economy. So, that’s always been the thought is that, you know, since we raised rates this far, we’ve always been pointing to cuts at a certain point.”

The updated SEP numbers show that policymakers anticipate the median federal funds rate to be 5.1 percent by the year’s end, up from the 4.6 percent expectation in the March report.

In addition, officials expect inflation and core inflation to run above the Fed’s 2 percent target rate until 2026.

Echoing the sentiment of Mr. Powell, market watchers expect the policymaking Federal Open Market Committee (FOMC) to remain data-dependent.

“The FOMC undoubtedly welcomed the news of softening data, but one monthly print is unlikely to have changed individual dot plots and the overall mindset of the group,” said Lon Erickson, a portfolio manager at Thornburg Investment Management. “The FOMC remains data-dependent and will want to see several monthly prints suggesting core inflation is on its way to 2% before lowering rates.”

The futures market expects the Fed to keep the policy rate unchanged at a range between 5.25 percent and 5.5 percent at next month’s meeting. Investors mostly think the central bank will cut it a quarter-point in September, according to the CME FedWatch Tool.

Labor Data

First-time unemployment benefit claims rose to a 10-month high of 242,000 for the week that ended on June 8, according to the Department of Labor. This topped the consensus estimate of 225,000 and was up from the previous week’s reading of 229,000.

Continuing jobless claims increased to a higher-than-expected 1.82 million, from 1.79 million. The four-week average, which eliminates week-to-week volatility, jumped to 227,000.

When asked about the divergence in the labor market data, Mr. Powell noted that the numbers might be “overstated.”

“There is an argument that payroll growth may be a bit overstated,” he told reporters on June 12.

Last month, the U.S. economy added 272,000 new jobs. However, the household survey component of the monthly employment snapshot revealed that jobs declined by more than 400,000. Full-time jobs also dropped sharply by more than 600,000 in May, while part-time positions increased by 286,000.