The increase in wholesale inflation last month was largely driven by a notable 0.6% rise in services prices, primarily due to higher profit margins for machinery and auto wholesalers. However, profit margins for wholesalers and retailers—categorized as “trade services” in the producer price report—are often very volatile. A measure of wholesale inflation that excludes trade services, food, and energy remained unchanged from May to June, which helps explain why many economists were not alarmed by Friday’s unexpected uptick in overall wholesale inflation. In addition, the overall prices of goods fell by 0.5%. Gasoline prices dropped significantly, tumbling 5.8% at the wholesale level, while food prices also saw a decline.
US wholesale inflation picked up in June in sign that some price pressures remain elevatedhttps://t.co/ptUsgBUjx2
— Michael Drysch (@HalfCourtMikeD) July 12, 2024
The producer price index (PPI) can provide an early indication of where consumer inflation is headed. Economists closely monitor it because some of its components, particularly healthcare and financial services, are included in the Federal Reserve’s preferred inflation gauge—the personal consumption expenditures (PCE) index. Some of the wholesale price components that feed into PCE, including certain healthcare costs, came in below expectations, raising hopes for continued progress toward easing consumer price inflation and reassuring the Fed.
These wholesale figures followed the government’s report that consumer inflation cooled in June for the third consecutive month. Consumer prices declined by 0.1% from May to June, marking the first such drop in overall inflation since May 2020, when the economy was heavily impacted by the pandemic.
Overall, this week’s price figures, along with other recent data, still suggest a continued slowdown in the inflation that initially surged three years ago, when the economy rapidly recovered from the pandemic recession, causing deep supply shortages and skyrocketing prices.
In response to the inflation spike, the Fed raised its benchmark interest rate 11 times in 2022 and 2023, reaching a 23-year high. This aggressive action aimed to curb price spikes, and while inflation has since cooled from its four-decade high of 9.1%, the central bank is widely expected to begin cutting interest rates in September.
Comerica Bank senior economist Bill Adams stated, “The big picture is that inflation pressures have regulated over the last two years but are still a bit greater than the Fed would like them to be.” The Fed believes that the moment is almost perfect to begin lowering interest rates because the economy is currently in a low gear. However, they intend to reduce gradually.
We don’t only produce foods, we deliver nationwide in wholesale and retail prices and no amount is too small to shop from us.
Also, our products are available in supermarkets in Osun State, Oyo State, Lagos State, etc. pic.twitter.com/NZPs9qHuZh
— Bhmil Foods (@BhmilFoods) July 12, 2024
Rate cuts by the Fed would likely lead to lower borrowing costs for mortgages, auto loans, credit cards, and business borrowing over time, potentially boosting stock prices.
A brief pickup in inflation earlier this year caused Fed officials to scale back their expectations for interest rate cuts. Policymakers indicated they would need to see several months of mild price increases to feel confident enough to reduce their key rate from its 23-year high.
Food, rent, healthcare, and other basics are still far more expensive than they were prior to the pandemic, despite a general slowdown in inflation. This is increasing unhappiness among the public and could jeopardize President Joe Biden’s chances of winning reelection.
US PPI rose 0.2% in June, above expectation of +0.1%
– Services +0.6% (Trade +1.9%)
– Wholesale goods prices -0.5% (Energy -2.6%, Food -0.3%)
– Core PPI +0.4%, vs. expectations of +0.2%May PPI revised up from -0.2% to flat, with core PPI up from flat to 0.3%.#PPI #inflation pic.twitter.com/HBo0sRx8s4
— CambrianMacroResearch (@CambrianMR) July 12, 2024
Despite lingering inflation pressures and higher borrowing costs, the U.S. economy remains steady, albeit gradually slowing. Hiring continues to be solid, and unemployment remains relatively low, providing Americans with unusual job security. The United States’ wholesale prices increased by 2.6% last month compared to a year earlier, which was more than anticipated. This was the biggest year-over-year increase since March 2023 and suggests that some inflation pressures are still present.
The Labor Department reported that the PPI, which tracks inflation before it reaches consumers, rose 0.2% from May to June after being unchanged the previous month. With the volatile costs of food and energy excluded, core wholesale prices grew by 0.4% in May 2023 and 3% in June of the same year.
Key Points:
i. Wholesale inflation saw a 0.6% rise in services prices in June, driven by higher profit margins for machinery and auto wholesalers, though excluding volatile categories, it remained unchanged from May to June.
ii. Overall goods prices fell by 0.5%, with significant drops in gasoline (5.8%) and food prices.
iii. The producer price index (PPI) provides an early indication of consumer inflation, and some components came in below expectations, raising hopes for easing consumer price inflation.
iv. Despite inflation cooling, essential costs like food, rent, and healthcare remain high, posing potential political challenges for President Biden.
v. The U.S. economy remains steady but slow, with solid hiring and low unemployment, while the Federal Reserve is expected to begin cutting interest rates gradually from its 23-year high in response to moderated inflation pressures.
Kirk Volo – Reprinted with permission of Whatfinger News
