Producer prices increased in June by 0.5% after a 0.4% rise in May. This was more than the expected increase of 0.3%. Meanwhile, the seasonally adjusted annual change is still only 0.3% higher, after being unchanged in May. The core rate was 0.4% higher after a 0.3% reading in the previous month and was also well above expectations for a 0.1% increase. Meanwhile, service prices (63.5% weighting in the index) were 0.4% higher and goods prices (34.7% weighting) rose by 0.8%.
Regarding the 0.8% goods reading, over three-quarters of this increase can be traced to the 1.2% rise in final demand for energy, whereas the rise in services prices was related to final demand services less trade, transportation, and warehousing, which also moved up 0.4%. With regard to pipeline inflation, intermediate processed goods excluding food and energy were 0.2% higher, while unprocessed core goods prices were 0.3% lower. The 12-month changes in the core processed intermediate goods and unprocessed goods were -1.9% and -3.2%, respectively—still showing significant downward pricing pressure, although that pressure is steadily easing.
Wholesale pricing pressures remain on the whole weak, with headline price just barely positive and core prices still just 1.3% higher. As we proceed through this year and the base effect from lower commodity prices gradually falls out, headline prices will continue to move back up to where the core rate of inflation currently resides. The question is really, how much higher do those headline and core rates rise? Our feeling is that they are likely to remain relatively muted, i.e., not meaningfully above 2% for some time. For producer prices, the difficulty remains the stronger dollar, the ongoing high levels of inventories, commodity producers still unable to reduce production capacity, a very tough profits environment, and little in the way of rising end-demand growth from China. For the Fed, this means simply means it should still not be in any hurry to push up interest rates in the near term.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.