Producer Prices See Biggest Annual Surge on Record, Stoking Broader Inflation Concerns

Producer prices rose at their highest annual pace on record in August and slightly above expectations, with the newest inflation-related datapoint likely to reinforce broader concerns about rising prices as higher production costs tend to trickle down to consumers.

The Labor Department said in a Sept. 10 statement that, for the 12 months ending in August, the final demand producer price index (PPI) jumped by 8.3 percent, the highest number in the history of the series, which dates from 2010. Consensus forecasts, according to Investing.com, showed economists expected an 8.2 percent rise in the PPI final demand measure.

On a month-over-month basis, the final demand PPI rose 0.7 percent in August, lower than the 1.0 percent recorded in June and July, suggesting the peak in producer price inflation may have passed.

Producer prices less food, energy, and trade services—a gauge often preferred by economists as it excludes the most volatile components—rose 0.3 percent month-over-month in August, well below the 0.9 percent figure in July, which was the biggest advance in the number since it climbed 1.0 percent in January.

On a year-over-year basis, producer prices excluding food, energy, and trade services rose 6.3 percent in July from a year earlier. This, too, was the biggest jump since the Labor Department started tracking the number in 2014.

Final demand producer energy prices surged by a seasonally unadjusted 32.3 percent over the year in August, goods advanced 12.6 percent, and food 12.7 percent, the data show.

High producer prices were also a key theme in the Federal Reserve’s most recent edition of the “Beige Book,” released on Sept. 8, which provides periodic economic snapshots of the United States, based on reporting from the central bank’s 12 districts. The report covered the period of early July through August.

Half of the districts described input price inflation as “strong,” while the other half characterized it as “moderate.” Resource shortages were “pervasive” and input price pressures “widespread,” with many businesses reporting difficulty sourcing key inputs, even at greatly increased prices, the report says.

A number of U.S. businesses facing supply-crunch-driven inflation in input costs reported expecting to pass on those higher prices to consumers.

“A sizable share of contacts in all sectors plan to increase prices over the next six months,” the Beige Book authors wrote, adding that several of the 12 districts indicated that businesses expect “significant hikes” in their selling prices in the months ahead.

Since producers often pass on higher input costs to consumers, production input prices are widely seen as a leading indicator of consumer price inflation, which accounts for the bulk of overall inflation.

Consumer prices, meanwhile, rose in July, although at their slowest monthly pace since February, with the Labor Department stating in a report on Aug. 11 that the consumer price index (CPI) jumped 0.5 percent in July from June, after the previous monthly increase of 0.9 percent.

Over-the-year consumer price inflation stood at 5.4 percent in July, matching the June figure, which was the highest 12-month spike since 2008. The next CPI data release, which will show the pace of consumer price inflation in August, is scheduled for Sept. 14.

While the elevated manufacturing price data suggests that consumers are more likely to see prices rise in the future, Federal Reserve officials have repeatedly said they believe consumer price increases are transitory, with the expectation that inflation will eventually moderate back to the central bank’s longer-run average target of 2 percent.

Fed officials have also said the ultra-easy monetary settings will stay in place until they see a more solid labor market recovery, although they have acknowledged inflationary pressures and are discussing when to begin pulling back on the central bank’s extraordinary support measures for the economy.

Last year, the Fed cut its benchmark overnight interest rate to near zero and began buying $120 billion in treasuries and mortgage-backed securities each month to bolster the economic recovery.

U.S. economic output has fully bounced back to its pre-pandemic levels, but the labor market recovery is trailing, with the U.S. economy remaining around 5 million jobs down from before the outbreak. After shedding more than 22 million jobs in the first two months of the pandemic, the U.S. economy has since recovered around 17 million jobs. 

By Tom Ozimek

 

Tom Ozimek has a broad background in journalism, deposit insurance, marketing and communications, and adult education. The best writing advice he’s ever heard is from Roy Peter Clark: ‘Hit your target’ and ‘leave the best for last.’

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