U.S. producer prices post biggest annual increase in more than 10 and a half years

WASHINGTON, July 14 (Reuters) – U.S. producer prices accelerated in June, leading to the largest annual increase in more than 10 and a half years, suggesting inflation may remain high as robust demand fueled by the recovery of the economy after the COVID-19 pandemic is straining the supply chain.

Wednesday’s Labor Department report followed Tuesday’s news that consumer prices rose the most in 13 years in June. There are, however, signs that inflation is nearing its peak. Underlying producer prices increased at a moderate pace on a monthly basis in June.

Federal Reserve Chairman Jerome Powell told a congressional hearing on Wednesday that “inflation has risen dramatically and will likely remain high in the coming months before it moderates.” Powell has long argued that high inflation is transitory, a view shared by most economists and the White House. Read more

The producer price index for final demand rose 1.0% last month after rising 0.8% in May. A 0.8% jump in the cost of services explains nearly 60% of the increase in the PPI. Services rose 0.6% in May. Commodity prices climbed 1.2% after accelerating 1.5% the month before.

In the 12 months to June, the PPI jumped 7.3%. This was the largest year-over-year increase since November 2010 and followed a 6.6% gain in May. Economists polled by Reuters had forecast the PPI to rise 0.6% in June and 6.8% year-on-year.

Rising raw material prices and rising labor costs due to a shortage of volunteer workers are driving inflation out of the factory. Very low inventory levels due to supply chain issues make it easy for producers to pass costs on to consumers. Sectors at the center of the economy’s reopening saw significant price increases, although there were signs in June that inflation was spreading to other segments. Read more

“Producers continue to struggle to meet strong consumer demand in the face of supply chain bottlenecks and workforce reallocation challenges,” said Chris Low, chief economist at FHN Financial in New York City. . “After months of steady increases in wholesale prices, there is still strong pressure to move to broader increases in consumer prices.”

There is some skepticism that high inflation is temporary. The Fed’s latest Beige Book report, a collection of anecdotes from businesses across the country, showed Wednesday that “while some contacts believed the price pressures were transient, the majority expected further increases in prices. input costs and selling prices in the coming months “. Read more

Stocks on Wall Street rose as the S&P 500 Index (.SPX) hit an all-time high as Powell’s comments fueled hopes that the US central bank would maintain its accommodative monetary policy. The dollar (.DXY) slipped against a basket of currencies. US Treasury yields have fallen.

MAXIMUM PROBABLE OF INFLATION

The Fed cut its overnight key rate to near zero last year and is pumping money into the economy through monthly bond purchases. This super-easy monetary policy stance, COVID-19 vaccinations and nearly $ 6 trillion in government aid since the start of the pandemic in the United States in March 2020 are driving demand.

But inflation is probably near its peak. Excluding the volatile components of food, energy and commercial services, producer prices rose 0.5%. The core PPI gained 0.7% in May. In the 12 months to June, the core PPI index accelerated 5.5%. This is the biggest increase since the government introduced the series in August 2014 and follows a 5.3% increase in May.

“We believe this will be the peak of the pace of wholesale inflation as the base effects subside, but continued friction between supply and demand will continue to keep prices stable through 2021 and into 2022, “said Mahir Rasheed, US economist at Oxford Economics in New York.

A separate report from the Atlanta Fed on Wednesday showed that its fixed-price consumer price index, a weighted basket of items whose prices change relatively slowly, rose 3.5% on an annualized basis in June after climbing 4.5% in May.

The Fed has indicated that it may tolerate higher inflation for a period of time to compensate for years in which inflation has remained below its target of 2%, a flexible average. The Fed’s preferred measure of inflation, the basic personal consumption expenditure price index, climbed 3.4% in May, the largest gain since April 1992.

Last month’s rise in service costs was driven by a 2.1% rise in commercial services, which measures changes in margins received by retailers and wholesalers. Twenty percent of the increase in services was attributable to automotive and parts retail margins, which rose 10.5%.

There were also increases in the prices of machinery, hardware, building materials and supplies, room rentals, professional and commercial equipment and passenger transportation.

Wholesale energy prices rose 2.1%. Food prices climbed 0.8%. Wholesale prices for basic goods rose 1.0% after gaining 1.1% in May. Although softwood lumber prices fell 0.7%, they rose to a record 125.3% from a year ago. Expensive lumber is holding back residential construction, which contributes to soaring house price inflation.

Some of the components of the PPI, which feed the core PCE price index, were weak last month. Healthcare costs fell 0.1% after gaining 0.2% the month before. Portfolio management fees fell 0.3% after rising 2.0% in May. But plane tickets rebounded 2.5% after falling 1.3% in May.

“This should delay the June PCE inflation data, but even so, it looks like the monthly change in core PCE inflation will be strong for June,” said Daniel Silver, economist at JPMorgan in New York.

With CPI and PPI data in hand, economists estimate that the core PCE price index rose 0.4% in June, which would translate into an increase of about 3.5% year-on-year. the other. The data is expected to be released at the end of this month.

Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Paul Simao and Andrea Ricci

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