Producer Prices Soar in May, Suggesting More Inflation Pain for Consumers

Line workers spot weld parts of the frame on the flex line at Nissan Motor Co’s automobile manufacturing plant in Smyrna, Tenn., on Aug. 23, 2018. William DeShazer/Reuters

Producer prices rose faster in May, reversing their month-over-month decline in April and eroding hopes for a softening of the broader inflationary environment as wholesale prices tend to get passed along to households in the form of consumer price inflation.

The Producer Price Index (PPI), which tracks inflation before it hits consumers, rose by 0.8 percent in May, in line with forecasts but twice the pace of April’s month-over-month price growth. The 0.5 percent pace of wholesale price acceleration in April marked a sharp drop from the blistering 1.6 percent notched in March, raising expectations that price pressures were starting to ease.

But the new data suggests more inflationary pain is in store for consumers as business input costs tend to filter down to households in the form of higher prices.

“Together with the recent data on long-term inflationary expectations, they are indicative of price pressures still in the pipeline,” Allianz chief economic adviser Mohamed El-Erian said in a tweet commenting on the PPI data implications, while consumer expectations for inflation over a one-year horizon hit a record high in May, according to recent New York Fed data.

The monthly core PPI gauge, which strips out the volatile categories of food and energy, rose 0.5 percent in May, nearly three times the 0.2 percent pace recorded in April, reinforcing the view that underlying inflationary pressures are stubbornly persistent.

On a year-over-year basis, the headline PPI index eased slightly from April’s 10.9 percent rate of growth to a still-scorching 10.8 percent in May, while the core PPI measure fell to 8.3 percent year-over-year in May from 8.8 percent in April.

“PPI this high means inflation isn’t close to moderating,” RJR Capital said in a tweet, commenting on the figures.

The wholesale price growth dynamic reflected in Tuesday’s data largely mirrors that of consumer price growth, which accelerated month-over-month in May by 1.0 percent, over three times the pace of April’s 0.3 percent uptick.

Soaring inflation has put pressure on the Fed to move faster and further to tighten monetary settings, with many analysts expecting two back-to-back half-point hikes.

“In response to higher than tolerable inflation, the Federal Open Market Committee is seen ready to deliver a pair of half-point, or fifty basis points, rate increases at the forthcoming June and July meetings,” Bankrate Senior Economic Analyst Mark Hamrick told The Epoch Times in an emailed statement.

“As it stands, the target for the benchmark federal funds rate is between three-quarters and one percent, still well below what the central bank has regarded as neutral or between two and three percent. It is possible that the Fed will take rates above neutral depending how inflation behaves later this year and next,” Hamrick added.

Some economists think the Fed might deliver a shock 75 basis point hike at its June policy meeting, which would mark the first time since 1994 for a rate increase of such proportions.

At the time of reporting, CME Group’s Fed Watch tool was showing a 94 percent probability of a 75 basis point hike at the Fed’s June meeting.