Producer or wholesale price inflation unexpectedly accelerated in June to reach its highest rate since March 2023. This development is untimely for the US economy, coming a day after the government announced that consumer prices fell monthly for the first time in four years.
The Producer Price Index (PPI), which measures the average price variations observed by producers and manufacturers, was 2.6% in the 12 months ended in June, representing an unexpected increase from the 2.4% annual rate recorded in May, according to Bureau of Labor Statistics data released Friday. Monthly, prices rose 0.2%, after remaining stable in May.
The increase in June was attributed to a sharp rise in final demand services, specifically commercial services margins, which shot up 1.9% compared to May, marking the largest monthly increase for that category since March 2022. "Strong PPI readings tend to support pricing power, which is clearly relaxing, and stronger profit margins," Joe Brusuelas, chief economist at RSM US, told CNN via emails. "My sense is that, with the economy and inflation cooling back toward more sustainable levels, margins are likely to remain strong, but tight."
Economists expected prices to rise 0.1% monthly and remain stable at 2.2% annually. Excluding energy and food-related prices, the core PPI rose 0.4% on the month and stood at 3% annually, its highest rate since April 2023. The PPI is a potential indicator of retail inflation in the coming months.
For American consumers, inflation has trended in the desired direction over the past two months. Despite a brief spike in price increases in the first quarter of the year, which ended up delaying the Federal Reserve's plans to cut interest rates, inflation has cooled considerably over the subsequent three months. On Thursday, the US economy received more good news in the latest Consumer Price Index (CPI), the most widely used inflation indicator, which measures average changes in the prices of commonly purchased goods and services. Prices fell monthly for the first time since May 2020, and annual inflation slowed to 3%, its slowest pace since June 2023.
"This Friday's stronger-than-expected PPI is an important reminder that inflation is still here and that inflation data can be volatile," Clark Bellin, president and chief investment officer of Bellwether Wealth, wrote in a note to customers on Thursday. "Although Friday's strong PPI comes after Thursday's weak CPI print, the Federal Reserve is data dependent and will examine each inflation data point before deciding whether to cut interest rates." Despite the stronger-than-expected PPI number, Bellin said he believes rate cuts are still on the table for September.
