The numbers: U.S. wholesale prices jumped again in May for the fifth month in a row in a sign that inflationary pressures tied to the reopening of the U.S. economy are likely to persist through the summer.
The producer price index rose 0.8% last month, the government said Tuesday. Economists polled by Dow Jones and The Wall Street Journal had forecast a 0.5% increase.
The rate of wholesale inflation over the past 12 months, meanwhile, escalated to 6.6% from 6.2% in the prior month. That’s the highest level since the index was reformulated in 2009.
The rate of inflation had turned negative early in the coronavirus pandemic and it was still quite low as recently as the end of last year.
Yet prices began to surge early in 2021 as more people got vaccinated, coronavirus cases sank, the government dished out another massive dose of stimulus money, and demand for all sorts of goods and services began to outstrip supply.
Big picture: The Federal Reserve contends the recent burst of inflation will peter out by next year. Companies will hire more workers, boost production and satisfy the surge in pentup demand after the economy is fully reopen and operating normally, the argument goes.
The Fed is probably right that inflation will taper off, economists say, but it’s not so clear that the annual increase in prices will drop to the Fed’s 2% target — and stay there.
So far investors aren’t panicking. Stocks remain near record highs and interest rates are still quite low. Chairman Jerome Powell will give more clues on the Fed’s thinking on Wednesday after the central bank’s latest evaluation of the economy.
Key details: About 60% of the increase in wholesale inflation last month reflected the higher cost of goods: new autos, gasoline, metals, farm seeds and beef and so forth.
Wholesale food prices surged 2.6% in May on top of a 2.1% increase in the prior month. Rising prices of corn and other farm goods are expected to raise the cost of groceries in the coming months.
The cost of energy rose 2.2% in May.
The core rate of wholesale inflation, meanwhile, rose 0.7% last month. The core rate is a less volatile measure that strips out food, energy and trade margins. It tends to give a more accurate picture of inflationary trends.
The increase in the core rate over the past 12 months moved up to 5.3% from 4.6%, marking the largest gain since the government first began reporting it in 2014.
Nor does any price relief seem to be the offing, at least in the next few months. The cost of raw and partly finished goods in the earlier stages of production both rose sharply in May.
Higher wholesale prices, it should be kept in mind, don’t always translate into higher inflation. Companies raise prices for any number of reasons.
While both wholesale and consumer prices are trending upward, most of the increase in producer prices is not being passed onto consumers. Not yet anyway.
What they are saying? “No end is in sight to the reopening surge in prices,” said chief economist Ian Shepherdon of Pantheon Macroeconomics ” The Fed is not driven by the PPI, but the numbers are startling.”
“The underlying causes of inflation are supply chain disruptions, labor shortages, and emergency stimulus, which is boosting demand. All of these drivers of inflation will be less of an issue in the second half of the year,” said senior economist Bill Adams of PNC Financial Services.
Market reaction: The Dow Jones Industrial Average
and S&P 500
were fell in Tuesday trades. Most investors don’t appear alarmed for now about the increase in inflation, but the PPI report robbed the stock market of momentum.