The Producer Price Index report on wholesale price inflation containing data for May will be released on June 14 at 8.30 a.m. EST. After peaking last summer, wholesale prices have seen disinflation, with annual data for April showing a 2.3% annual rise in PPI pricing, or 3.4% with foods, energy and trade services stripped out to create a less volatile wholesale inflation measure.
Services
However, beyond the aggregate headline figures for PPI, the Federal Reserve will be watching services inflation. Goods inflation has been relatively subdued after seeing explosive growth in 2022, but the Fed is concerned that services inflation may be remain sticky, preventing inflation returning to the Fed’s 2% goal.
Transportation and warehousing services have seen absolute declines in price recently as supply-chain blockages have cleared. However, a mixed bag of other intermediate services have risen in price, including financial services and property-related services. If that continues, it would be a disappointment for the Fed as the PPI can be an informative, if volatile, indicator of consumer prices over the coming months. Higher wholesale prices could ultimately drive consumer inflation higher.
Volatility
The PPI is a volatile series when compared to other inflation measures such as the CPI. As such, the uptick in April’s PPI inflation figures may contain more noise than signal. However, if rebounding services inflation becomes more of a trend over the next few months, then that may encourage the Fed to hold rates higher for longer.
On the other hand, if services inflation does trend lower still, then the Fed may be running out of inflationary concerns to worry about. PPI data for May and June 2021, the comparable period for upcoming releases, did contain strong monthly inflation. That means we could see inflation move lower simply as those relatively high figures roll off the 12-month inflation series. However, July 2021 onwards saw sharp disinflation in goods which may cause a rebound in headline PPI figures later this summer as that data also exits the inflation calculation.
The Fed’s Decision
Markets are expecting the Fed to hold rates steady on June 14, the same day as the PPI release. This potential course of action from the Fed is in part a recognition that interest rates are relatively restrictive, combined with a concern that inflationary forces are not yet fully beaten.
However, beyond the June meeting, the path for rates later in 2023 is less clear. Some believe we are already at peak rates, perhaps even with rate cuts on the horizon, though the Fed disputes this. However if services inflation were to trend higher that might be a reason for the Fed to nudge rates incrementally higher in 2023.
Specifically, markets suspect that the Fed could well increase rates again at their July meeting, after a pausing in June, though that could be the final hike of this rate cycle, should it occur. Nonetheless, the PPI is less crucial datapoint for the Fed, with CPI and PCE inflation getting more of the Fed’s attention, since these are direct measures of the Fed’s ultimate consumer inflation target.
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