US Wholesale Inflation Rose More Than Expected In July

US wholesale inflation rises more than expected in July, reversing a year-long trend, with producer prices up 0.8%. Fed remains vigilant.

Minneapolis, Minnesota —
The Bureau of Labor Statistics reported on Friday that wholesale prices in the US went up more than expected in July, breaking a year-long trend of falling prices.

The Producer Price Index, which looks at how the prices businesses pay their sellers change on average, went up by 0.8% over a year. That’s more than the revised up 0.2% gain in June and more than the 0.7% gain that was expected, according to the consensus figures on Refinitiv.

From June to July, producer price increases went up by 0.3%, which is the most since January.

On guard for a flare-up

PPI is a popular way to measure inflation because it shows how average prices change before they reach consumers. It is a good indicator of how prices might change in shops.

Kurt Rankin, a senior economist at PNC Financial Services, said that services and the desire for services were the main things that caused producer prices to go up. Prices for services went up by 0.5% from June to July, which is the biggest monthly rise for this group since March 2022.

“The demand story is the inflation story now, whether you are a producer or a consumer,” he told in a report, “That’s mostly because people still spend money on services.”

He said that the food index, which had gone down for three straight months, went up by 0.5% in July, which showed that inflation was going at a 6.3% annual rate.

“Consumers continue to go out and spend money,” said Rankin. “And as long as people keep spending money, producers will have to meet that demand, which will drive up their costs for raw materials, transportation, etc.”

“And they’re going to pass those prices on to consumers,” he said.

That’s an awful circle.

“The numbers have been much better over the past six months, which is good news, but it’s a good reminder that the Federal Reserve is keeping an eye on the chance that inflation could start to rise again,” he said.

Still more to come

The report comes just one day after the Consumer Price Index showed that prices went up 3.2% yearly in July. This increase, which was less than the 3.3% experts were expecting, was mostly due to the fact that inflation was lower last year than it was this year.

Rankin pointed out that similar base effects also played a role in the main PPI rise.

Even though the index went up by 0.8%, that doesn’t tell the whole story because it went down in five of the seven months before that. He said that if you took the 0.3% monthly increase and multiplied it by 12, the PPI rate would be about 3.6% and the core rate would be 3.8%.

So, he said, the July number shows that there are still some cost pressures on producers.

When you take out the more volatile areas of food and energy, the core PPI rose 2.4% annually in July. That’s about the same as what was seen in June, but a little bit higher than what economists expected, which was a slight cooling.

Core PPI went up 0.3% from one month to the next, which was also the biggest monthly gain since January.

“The underlying trends show that PPI inflation is reverting to its pre-pandemic run rate,” Oxford Economics economists Matthew Martin and Oren Klachkin wrote in a note on Friday. However, progress is expected to be slower in the second half of 2023 than in the first. “These numbers will make Fed officials feel better, but policymakers are likely to keep their hawkish tone and keep a close eye on whether last month’s rise in service prices continues in the coming months.”

Energy wild card

After the report came out, US stock futures fell because the data was hotter than predicted. This made people worry that the Fed might keep raising interest rates to stop inflation. Since then, the Dow has cut its losses and is back in the black.

One month doesn’t make a trend, and this result shouldn’t be enough for the Fed to raise rates in September, but it could make things worse, Rankin said.

He said, “One spark could get this going again.” “Over the past few weeks, energy prices, especially oil costs, have been going up. When the price of oil goes up, it affects not only the cost of making things, but also the cost of getting goods to market and even food to places. So even services, entertainment, and hospitality can be hurt when energy prices go up, so that’s always a chance.

The PPI’s energy measure showed that prices were flat in July, even though they went up by 0.7% in June.

“Since energy prices didn’t play a role in this month’s reading, this number going up is a stark reminder that the Federal Reserve’s fight against inflation and their talk about it will remain hawkish in the near future.”

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