Producer prices increased more than anticipated in June, according to the latest data from the Bureau of Labor Statistics.
- M-O-M: The Producer Price Index (PPI) rose by 0.2%, up from 0% in May, yet still representing the third-lowest increase this year.
- Y-O-Y: The monthly jump pushed the annual PPI growth to 2.6%, up from 2.4% in May, marking the fifth consecutive increase and the highest level since May 2023.
The Core: Core prices, excluding food and energy, rose by 0.4% in June, up from 0.3% in May. This is the third-largest jump this year.
- On an annual basis, core prices have surged by 3.0%, a notable increase from 2.6% in May, reaching the highest level since May 2023. This marks the sixth increase in the past seven months.
Worse Than Expected: Economists had predicted a more modest rise of 0.1% for June, expecting it to slow the annual index to 2.3%. Similarly, they forecasted a smaller increase for core prices (+0.2%) and anticipated that the annual core index would decelerate to 2.5%. The unexpected rise in both headline and core producer prices suggests persistent inflationary pressures in the supply chain.
Services vs Goods: Services continue to be the driver of inflation as prices for final demand services saw a significant jump, rising by 0.6% in June. This was up from the 0.3% rise in May and marks the third time this year that service prices have increased by 0.6%.
- In contrast, prices for final demand goods fell for the second consecutive month, with a 0.5% drop in June following a 0.8% decline in May. This is the fourth time this year that goods prices have decreased. A major factor in this decrease was a sharp 5.8% decline in gasoline prices, which accounted for over 60% of the overall drop in the index for final-demand goods.
Fed Watch: The surprising increase in producer prices raises questions about the Federal Reserve’s approach to interest rates. Producer prices often precede changes in consumer prices, which could prompt the Fed to adopt a more cautious stance on rate cuts. However, the CME Fed Watch tool currently indicates a 90% likelihood of a rate cut in July, suggesting that a rate cut remains very likely unless further economic developments alter this trajectory.
Overall, the June PPI report highlights the ongoing challenges in managing inflation, with rising costs in production sectors posing risks to broader economic stability. The data underscores the importance of closely monitoring inflation trends to ensure appropriate policy responses.
