Producer prices rose at their highest annual pace on record in August and slightly above expectations, with the newest inflation-related datapoint likely to reinforce broader concerns about rising prices as higher production costs tend to trickle down to consumers.
On a month-over-month basis, the final demand PPI rose 0.7 percent in August, lower than the 1.0 percent recorded in June and July, suggesting the peak in producer price inflation may have passed.
Producer prices less food, energy, and trade services—a gauge often preferred by economists as it excludes the most volatile components—rose 0.3 percent month-over-month in August, well below the 0.9 percent figure in July, which was the biggest advance in the number since it climbed 1.0 percent in January.
On a year-over-year basis, producer prices excluding food, energy, and trade services rose 6.3 percent in July from a year earlier. This, too, was the biggest jump since the Labor Department started tracking the number in 2014.
Half of the districts described input price inflation as “strong,” while the other half characterized it as “moderate.” Resource shortages were “pervasive” and input price pressures “widespread,” with many businesses reporting difficulty sourcing key inputs, even at greatly increased prices, the report says.
A number of U.S. businesses facing supply-crunch-driven inflation in input costs reported expecting to pass on those higher prices to consumers.
Since producers often pass on higher input costs to consumers, production input prices are widely seen as a leading indicator of consumer price inflation, which accounts for the bulk of overall inflation.
While the elevated manufacturing price data suggests that consumers are more likely to see prices rise in the future, Federal Reserve officials have repeatedly said they believe consumer price increases are transitory, with the expectation that inflation will eventually moderate back to the central bank’s longer-run average target of 2 percent.
Fed officials have also said the ultra-easy monetary settings will stay in place until they see a more solid labor market recovery, although they have acknowledged inflationary pressures and are discussing when to begin pulling back on the central bank’s extraordinary support measures for the economy.
Last year, the Fed cut its benchmark overnight interest rate to near zero and began buying $120 billion in treasuries and mortgage-backed securities each month to bolster the economic recovery.
U.S. economic output has fully bounced back to its pre-pandemic levels, but the labor market recovery is trailing, with the U.S. economy remaining around 5 million jobs down from before the outbreak. After shedding more than 22 million jobs in the first two months of the pandemic, the U.S. economy has since recovered around 17 million jobs.
