Home Energy services U.S. producer prices rise at a steady pace, adding to pressure from the Fed

U.S. producer prices rise at a steady pace, adding to pressure from the Fed

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Prices paid to US producers jumped in May, underscoring lingering inflationary pressures across the economy that should prompt the Federal Reserve to aggressively raise interest rates.

The producer price index for final demand rose 0.8% from April and 10.8% from a year earlier, Labor Department data showed Tuesday. This followed a 0.4% advance the previous month.

Nearly two-thirds of May’s increase is attributable to a rise in the price of goods, particularly energy.

Excluding food and energy, the so-called basic PPI increased by 0.5% in May and by 8.3% compared to May 2021.

The numbers are the latest indication that inflation will stay higher for longer than most economists — and the Fed — had earlier predicted. Data released last week showed consumer inflation unexpectedly accelerated to its highest level in four decades in May in a broad-based advance that dashed hopes that inflation was beginning to moderate.

JPMorgan Chase & Co. and Wells Fargo & Co. are among a number of banks now expecting the Fed to raise interest rates by 75 basis points this week, which would be the most significant since 1994. CPI data, along with recent inflation expectations, has surprised on the upside, likely leading the Fed to consider a hike of this magnitude.

“The latest PPI data confirms that inflationary pressures continue to build in the goods and services sectors, prompting the FOMC to act decisively to restore price stability,” said Mahir Rasheed and Kathy Bostjancic of Oxford. Economics in a note, referring to the policy-making of the Federal Open Market Committee.

Although prices for some commodities have come down from April’s peak, broader inflationary pressures don’t appear to be abating any time soon.

Russia’s war in Ukraine continues to upend food and oil supplies around the world, and China has begun reimposing COVID-19 restrictions just weeks after easing them in major cities. The upcoming expiration of employment contracts for more than 22,000 West Coast dockworkers threatens to further disrupt supply chains.

“Risks to producer price inflation remain on the upside in the near term, and any sustained moderation will only occur gradually over the second half of 2022,” the economists said.

Goods prices rose 1.4%, led by a 5% rise in energy. Services prices rose 0.4% from April, after falling the previous month. This increase included a 2.9% increase in transportation and warehousing costs.

Median forecasts from a Bloomberg survey of economists called for a 0.8% monthly advance in the overall PPI and a 10.9% year-over-year increase.

The final food demand index remained unchanged from the previous month, limited by lower prices for beef and pork. This could be encouraging for consumer meat prices all the way.

Economists look to certain categories in the PPI report to gauge the impact on the price index of personal consumption expenditures, which the Fed uses as its preferred gauge of inflation.

Producer prices excluding food, energy and commercial services, which exclude the most volatile components of the index, rose 0.5% in May and 6.8% from a year ago.

Costs of processed goods for intermediate demand, which reflect prices earlier in the production pipeline, rose 2.3% in May, matching the strongest since October.

Reporting by Reade Pickert for Bloomberg News.

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