Producer Prices See Biggest Annual Surge on Record, Stoking Consumer Inflation Concerns

Autonomous robots assemble an X model SUV at the BMW manufacturing facility in Greer, S.C., on Nov. 4, 2019. Charles Mostoller/Reuters File Photo

Producer prices rose above expectations in July, marking their biggest 12-month increase on record and reinforcing broader concerns about inflation as higher production costs tend to filter down to consumers.

According to a Labor Department statement (pdf), for the 12 months ending in July, the producer price index (PPI) jumped by 7.8 percent, the highest number in the history of the series, which dates to 2010. Economists polled by Investing.com were expecting a 7.3 percent rise in the PPI final demand measure.

Producer prices excluding food, energy, and trade services—a gauge often preferred by economists because it excludes the most volatile components—rose 6.1 percent in July from a year earlier. This, too, was the biggest jump since the Labor Department started tracking the number in 2014.

Final demand producer energy prices surged by a seasonally unadjusted 33.4 percent over the year in July, goods advanced 11.9 percent, and food 9.5 percent, the data show.

On a month-over-month basis, the final demand PPI rose 1.0 percent in July, matching the June number but lower than the January peak of 1.2 percent, which was a series high. Producer prices less food, energy, and trade services rose 0.9 percent in July, the biggest advance since climbing 1.0 percent in January.

Producer prices are considered a leading indicator of consumer price inflation, which accounts for the bulk of overall inflation. While the elevated manufacturing price data suggest 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.

Consumer prices, meanwhile, rose in July, although at their slowest monthly pace since February, with the Labor Department stating in a report on Aug. 11 that the consumer price index (CPI) jumped 0.5 percent in July from June, after the previous monthly increase of 0.9 percent.

Over-the-year consumer price inflation stood at 5.4 percent in July, matching the June figure, which was the highest 12-month spike since 2008.

The seasonally unadjusted CPI percent changes for the 12 months through July in categories such as regular gasoline (43 percent), used cars and trucks (41.7 percent), lodging away from home (21.5 percent), airline fares (19 percent), and bacon (11.0 percent) paint a stark picture of the inflationary pressures facing Americans.

Customers shop for produce at a supermarket in Chicago, on June 10, 2021. Scott Olson/Getty Images

A comparison to 2019 figures, which discounts the base effect of last year’s drop in inflationary pressures, suggests U.S. household worries about inflation are well-grounded.

“Comparing to the pre-pandemic 2019 levels, the CPI is up at an annualized 3.1 percent rate over the past two years, seasonally adjusted,“ Bankrate chief financial analyst Greg McBride told The Epoch Times in an emailed statement. ”This has accelerated from 3 percent in June and 2.55 percent in May, validating concerns about higher inflation.”

But while the apparent peak in the annual rate of consumer price increases boosts the narrative of “transitory” inflation that could now start to fade, a spillover of price pressures into other consumption categories suggests that higher inflation might stick around for longer.

For example, while used car prices have stabilized, rising 0.2 percent over the month in July after surging by 10.5 percent between May and June, monthly inflation has accelerated in categories such as recreation, personal services, and medical care.

“The annual rate of inflation has seemingly peaked, but the details show a broadening out of price pressures,” ING chief international economist James Knightley wrote in a note. “This indicates inflation is likely to be more persistent and pervasive than predicted by the Federal Reserve.”

McBride said that, while the monthly CPI numbers generally reinforce the “transitory” inflation view, there are risks to this outlook.

“Score one for the ‘inflation is transitory’ camp, with used car prices moderating to a 0.2 percent monthly increase, airfares dipping 0.1 percent, auto insurance falling 2.8 percent, and car and truck rental prices plunging 4.6 percent since last month. But shelter costs will be the category to watch in the months ahead as the rise in home prices and consequent rent increases they bring, are not yet reflected in the CPI,” he said.

While Fed officials have said the current bout of inflation is transitory and ultra-easy monetary settings will stay in place until they see a more solid labor market recovery, 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.

Although economic output has fully bounced back to its pre-pandemic levels, 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 nearly 17 million jobs.