Summary: US producer price index (PPI) up 0.8% in May, in line with expectations; annual rate falls from 10.9% to 10.7%; “core” PPI up 0.2%; figures do little to dampen US inflationary concerns; US Treasury yields higher, rate-rise expectations hardened noticeably: higher energy costs behind most of headline rate’s rise.
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 annual rates over the past twelve months have been well above the long-term average.
The latest figures published by the Bureau of Labor Statistics indicate producer prices rose by 0.8% after seasonal adjustments in May. The increase was in line with consensus expectations but double April’s revised figure of 0.4%. On a 12-month basis, the rate of producer price inflation after seasonal adjustments slowed from April’s revised rate of 10.9% to 10.7%.
Producer prices excluding foods and energy, or “core” PPI, rose by 0.5% after seasonal adjustments. The increase was less than the 0.6% rise which had been generally expected but considerably more than April’s 0.2% after it was revised down from 0.4%. The annual rate decreased from April’s revised rate of 8.7% to 8.3%.
NAB currency strategist Rodrigo Catril said the figures “did little to dampen US inflationary concerns…”
US Treasury bond yields rose on the day. By the close of business, the 2-year Treasury yield had added 3bps to 3.40%, the 10-year yield had gained 12bps to 3.48% while the 30-year yield finished 8bps higher at 3.43%.
In terms of US Fed policy, expectations of higher federal funds rates over the next 12 months hardened noticeably. At the close of business, June contracts implied an effective federal funds rate of 1.19%, 36bps higher than the current spot rate. July contracts implied 1.66% while May 2023 futures contracts implied an effective federal funds rate of 4.055%, nearly 325bps above the spot rate.
“Most of the rise in the headline index resulted from higher energy costs. Service prices rose 0.4% following a 0.2% drop in April,” said ANZ Head of Australian Economics David Plank.
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.