In light of the CPI data, energy shocks have driven up overall prices in the United States, while core inflation has remained relatively stable, providing the Federal Reserve with grounds to maintain a wait-and-see stance.......
Data released Thursday by the U.S. Bureau of Labor Statistics showed that U.S. wholesale prices rose significantly more than market expectations in May, indicating further upward pressure on inflation at the upstream end of the supply chain.
The seasonally adjusted Producer Price Index (PPI) for final demand rose 1.1% month-over-month, exceeding the market forecast of 0.7%, though the prior reading was revised down to 1.1% from 1.4%. The year-over-year PPI increase reached 6.5%, the highest level since November 2022, also surpassing the expected 6.5%; the previous year-over-year figure was revised down to 5.7% from 6%.
Excluding the volatile food and energy components, core PPI rose 0.4% month-over-month, slightly below the consensus market expectation of 0.5% and down from the prior month’s 0.7% (revised down from 1%). This also indirectly confirms that the current inflationary uptick is primarily driven by energy prices. Core PPI rose 4.9% year-over-year in May, also below the expected 5.4%; the prior reading was revised down to 4.9% from 5.2%.
When excluding food, energy, and trade services, the PPI surged 0.8% month-over-month—the largest single-month increase since March 2022—and rose 5.1% year-over-year, marking the highest level since October 2022.
Nearly 80% of the recent PPI increase stemmed from prices of final-demand goods, which soared 2.8% month-over-month in May—the largest monthly gain since this series began in December 2009. Of this rise in goods prices, approximately 80% was attributable to the energy component, which jumped 10.7% for the month; wholesale gasoline prices alone climbed 23.4% month-over-month, a notably sharp increase.
Prices for services also rose noticeably, with investment portfolio management fees increasing 4.8% month-over-month in May, driven by favorable stock market performance, making it a key contributor to service-sector inflation.
The day before the release of this PPI data, the U.S. Bureau of Labor Statistics had already published the Consumer Price Index (CPI) for May. Amid heightened energy prices driven by tensions involving Iran, the headline CPI surged to a year-over-year rate of 4.2%. However, core CPI remained relatively subdued, rising just 0.2% month-over-month and 2.9% year-over-year, indicating that non-energy price pressures remain broadly contained.
The alignment between upstream and downstream price indicators clearly demonstrates that energy supply shocks are the primary driver behind the recent resurgence in U.S. inflation.
Economists expect the U.S. Personal Consumption Expenditures (PCE) price index to have risen another 0.4% in May, following a 0.4% increase in April. This would push the year-over-year PCE inflation rate to 4%—the largest annual increase since May 2023, compared with April’s 3.8% gain.
Given persistent inflationary pressures, the Federal Reserve is widely expected to hold interest rates steady in the near term. The Federal Open Market Committee (FOMC) will announce its latest policy decision next Wednesday local time, and market pricing implies a nearly 100% probability that the benchmark interest rate will remain unchanged at this meeting.
Looking ahead to the full year, financial markets consider it highly unlikely that the Federal Reserve will cut interest rates. At the same time, market participants are betting that the Fed’s next policy move will most likely be a rate hike—a probability that has exceeded 60%—with December widely seen as the probable timing.
Earlier the same day, the European Central Bank announced a 25-basis-point increase in its key interest rate, proactively responding to rising inflation. In contrast to the ECB’s tightening stance, virtually no Federal Reserve officials have indicated support for following suit with a rate hike; the prevailing view favors maintaining a wait-and-see approach, allowing time for energy supply shocks to gradually dissipate and assessing whether inflation can return to the Fed’s long-term target range of 2%.
Editor/Rocky