Seasonally adjusted data shows the Producer Price Index (PPI) for May increased by 1.1% compared to the previous month, pushing the annual wholesale inflation rate to 6.5%, a level not seen since November 2022.
The core PPI, which excludes food and energy, rose by 0.4% month-on-month, slightly below the market consensus expectation of 0.5%, indicating that the current inflationary pressure is primarily driven by rising fuel costs.
Amidst heightened energy prices influenced by geopolitical tensions, US inflation accelerated significantly in May, recording its largest monthly increase in over three years and outpacing the growth in household income.
Data released by the Bureau of Labor Statistics on Thursday revealed that the increase in wholesale prices for May exceeded market forecasts, with upstream inflationary pressures continuing to build.
The Producer Price Index, which measures the cost of goods and services for final demand, rose by a seasonally adjusted 1.1% from April, with the annual wholesale inflation rate reaching 6.5%. Economists surveyed by Dow Jones had previously forecast a consensus monthly increase of only 0.7%.
The year-over-year increase for the overall index is the highest since November 2022, while the monthly increase matched the pace set in April.
After removing the volatile categories of food and energy, the core PPI rose 0.4% month-on-month, coming in below the market expectation of 0.5%, further confirming that rising fuel prices are the main driver behind this inflationary wave.
When also excluding trade services, the PPI surged 0.8% month-on-month, marking the largest single-month increase since March 2022. The core measure under this definition rose 5.1% year-over-year, reaching its highest level since October 2022.
Nearly 80% of the upward momentum in this PPI report came from a 2.8% monthly surge in final demand goods prices, the largest monthly increase since records began in December 2009. Within that goods price increase, 80% of the rise was attributable to a 10.7% jump in energy prices. Data from the Bureau of Labor Statistics showed wholesale gasoline prices soared by 23.4% from the previous month.
A significant contributor to the rise in service costs was portfolio management fees, which increased 4.8% month-on-month, bolstered by strong performance in the US stock market during May.
This PPI report follows the release of Consumer Price Index (CPI) data the previous day, which showed overall inflation surging to 4.2% in May, also largely pulled higher by energy price increases linked to geopolitical conflict. However, the monthly CPI data suggested a relatively moderate impact, with core CPI rising just 0.2% from April and core inflation standing at 2.9% year-over-year.
Nevertheless, the current inflationary environment is highly likely to compel the Federal Reserve to keep interest rates unchanged in the near term. The Federal Open Market Committee is scheduled to announce its latest policy decision on Wednesday, with market pricing indicating a nearly 100% probability that the benchmark interest rate will be held steady.
Beyond that, traders are betting there is no chance of a Federal Reserve rate cut this year. Furthermore, there is a greater than 60% probability that the Fed's next policy move will be a rate hike, with the most likely timing for such an increase being December.
Earlier the same day, the European Central Bank voted to raise interest rates by 25 basis points in an effort to curb soaring inflation. However, almost no Federal Reserve officials have expressed support for following the ECB's lead in tightening monetary policy. Most officials advocate for a wait-and-see approach, monitoring whether the energy supply shock gradually subsides and if inflation can retreat towards the Fed's 2% policy target.
Comments