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The Producer Price Index Remains Near Historic Highs

producer price index high
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EDITOR'S NOTE: 

Wholesale prices just jumped 10.8% year over year, as the Producer Price Index (PPI) remains near historic highs.

 

Why it’s significant: When manufacturers have to pay higher costs to produce goods, they usually transfer those costs over to consumers by raising prices. The price hike won’t be immediate but it's almost certainly forthcoming. So, higher PPI readings often lead to higher Consumer Price Index (CPI) readings. This means inflation may rise to even higher levels in the coming months.

Our thoughts: The Fed raised rates by 75 basis points yesterday. Interestingly, the markets reacted with a bullish fervor despite it being the largest rate hike since 1994. But this morning, the markets tanked. And why shouldn’t it? It’s as if the markets want a recession to get inflation over and done with so that the Fed can switch back to loose monetary policy mode once again. Whatever the outcome, it’s supportive of gold and silver allocations, near-term and long-term.

KEY POINTS
  • The producer price index rose 0.8% for the month and 10.8% over the past year.
  • The monthly gain was in line with estimates and the annual gain was slightly off the record 11.5% hit earlier this year.
  • The data is significant in that prices at the wholesale level feed through to consumer prices.

Wholesale prices rose at a brisk pace in May as inflation pressures mounted on the U.S. economy, the Bureau of Labor Statistics reported Tuesday.

The producer price index, a measure of the prices paid to producers of goods and services, rose 0.8% for the month and 10.8% over the past year. The monthly rise was in line with Dow Jones estimates and a doubling of the 0.4% pace in April.

Excluding food, energy and trade, so-called core PPI rose 0.5% on the month, slightly below the 0.6% estimate but an increase from the 0.4% reading in the previous month. On a year-over-year basis, the core measure was up 6.8%, matching April’s gain.

The two PPI measures remained near their historic highs — 11.5% for headline, and 7.1% for core, both hit in March.

The data is significant in that prices at the wholesale level feed through to consumer prices, which are running at their highest levels since December 1981. The consumer price index increased 8.6% annually in May, defying hopes that inflation had peaked in the spring.

Federal Reserve officials are watching the inflation numbers closely. Markets now expect the central bank to raise benchmark short-term borrowing rates by 75 basis points when their two-day meeting concludes Wednesday.

For wholesale prices, energy made up much of the May gains. The index for final demand energy rose 5% on the month, part of a 1.4% surge in final demand goods. The goods-services imbalance has been at the core of the inflation pressures, as consumer demand has shifted strongly in an economy that generally is more dependent on services.

Within that energy gain, gasoline rose 8.4%, while multiple other fuel categories pushed higher as well.

The services index advanced 0.4%, with transportation and warehousing services responsible for more than half the gain. The increases were softened by declines in fuels and lubricants, portfolio management and guest room rentals.

Stock market futures pointed to a rebound following the release. Government bond yields pulled back after massive gains Monday, with the benchmark 10-year note most recently yielding about 3.32%.

Originally published on CNBC.

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