Summary: US producer price index (PPI) up 0.7% in August, more than expected; annual rate increases to 1.6%; “core” PPI up 0.2%; ANZ: PPI ex energy very subdued, implies ongoing improvement; Treasury yields up; 2024 rate-cut expectations soften; goods prices up 2.0%, services prices up 0.2%.
Around the end of 2018, the annual inflation rate of the US producer price index (PPI) began a downtrend which continued through 2019. Months in which producer prices increased suggested the trend may have been coming to an end, only for it to continue, culminating in a plunge in April 2020. Figures returned to “normal” towards the end of that year but were well above the long-term average through 2021, 2022 and the first quarter of 2023.
The latest figures published by the Bureau of Labor Statistics indicate producer prices increased by 0.7% after seasonal adjustments in August. The result was greater than the 0.4% rise which had been generally expected as well as July’s 0.4% increase after it was revised up from 0.3%. On a 12-month basis, the rate of producer price inflation after seasonal adjustments and revisions accelerated from July’s revised figure of 0.9% to 1.6%.
Producer prices excluding foods and energy, or “core” PPI, increased by 0.2% after seasonal adjustments. The result was in line with expectations but half July’s 0.4%. The annual rate slowed from 2.4% to 2.1%.
“Outside of energy, the PPI rise was very subdued, implying ongoing improvement in underlying inflationary pressures,” said ANZ FX analyst Felix Ryan.
US Treasury bond yields rose moderately on the day. By the close of business, 2-year and 10-year Treasury yields had both gained 4bps to 5.01% and 4.29% respectively while the 30-year yield finished 3bps higher at 4.38%.
In terms of US Fed policy, expectations of a lower federal funds rate in the first half of 2024 softened. At the close of business, contracts implied the effective federal funds rate would average 5.335% in September, slightly above the current spot rate, 5.42% in November and 5.435% in December. September 2024 contracts implied 4.915%, 42bps less than the current rate.
The BLS stated a 2.0% rise in final demand goods accounted for 80% of the overall increase. Prices of final demand services increased by 0.2%.
The producer price index is a measure of prices received by producers for domestically produced goods, services and construction. It is put together in a fashion similar to the consumer price index (CPI) except it measures prices received from the producer’s perspective rather than from the perspective of a retailer or a consumer. It is another one of the various measures of inflation tracked by the US Fed, along with core personal consumption expenditure (PCE) price data.