Hotter-than-Expected PPI Muddies Improved Inflation Picture

This morning, the PPI rose 0.2% in June, a tenth of a percentage point more than expected and following no change (0.0%) the month prior (revised up from a 0.2% decline). Year-over-year, producer prices rose 2.6% in June, up from the 2.4% annual gain in May and marking the largest annual increase since March 2023.

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Food prices fell 0.3% and energy prices dropped 2.6% in June, the second consecutive month of decline. Excluding food and energy costs, the core PPI rose 0.4%, double the 0.2% increase expected and following a 0.3% rise in May (revised up from no change (0.0%). Year-over-year, the core PPI increased 3.0% in June, up from the 2.6% annual gain in May and the largest annual increase since April 2023.

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Additionally, services costs rose 0.6%, due to a 1.9% rise in trade costs. Transportation and warehousing costs, however, fell 0.4% in June.

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Parsing through the volatility of the details, the majority of the rise appears to be concentrated in margin adjustment last month. According to the Bureau of Labor Statistics (BLs) release, “Nearly all the June increase is attributable to a 1.9-percent jump in margins for final demand trade services.”

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Ahead of the PPI release, yesterday, the CPI unexpectedly fell 0.1% in June, the first monthly decline since May 2020. According to the median forecast, the CPI was expected to rise 0.1% at the end of Q2. Year-over-year, consumer prices rose 3.0%, a tenth of a percent point below expectations and down from the 3.3% annual increase in May.

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Food prices rose 0.2%, while energy prices dropped 2.0% in June following a similar decline in May. Thus on the consumer side, the majority of the improvement appears to be concentrated in energy costs. ?

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Excluding energy, the CPI rose 0.1% in June and 3.1% over the past 12 months, the smallest annual gain since April 2021.

Excluding food and energy costs, the core CPI rose 0.1% in June, a tenth of a percentage point less than expected and the smallest monthly increase since August 2021. June’s 0.1% rise marks the third consecutive month of cooling. Year-over-year, the core CPI increased 3.3%, also a tenth of a percentage point lower than expected and the slowest pace in more than three years.

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In the details of the report, medical care prices climbed 0.2%, as did shelter prices with a 0.3% gain in the OER. Also, other goods and services costs rose 0.6%, and recreation prices increased 0.1% in June following a 0.2% decline the month prior.

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On the other hand, transportation prices fell 1.3%, due to a 0.2% decline in new vehicle prices and a 1.5% drop in used cars and trucks prices. Additionally, airline fares declined 5.0%, marking the fourth consecutive month of a decline. Additionally, commodities prices slipped 0.4% in June, and education and communication prices fell 0.1%.

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Another iteration of inflation, the supercore – defined as core services excluding housing – declined 0.1% in June following no change (0.0%) the month prior. Over the past 12 months, the supercore increased 4.6%, down from the 4.7% annual increase in May.

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Bottom Line: A hotter-than-expected PPI report on the heels of yesterday’s cooler-than-expected read on the CPI is a welcome reminder of why the Committee has been steadfast in its need to see “many” months of improving data to instill confidence of a sustained disinflation trend.?It’s furthermore, a reminder why policy makers have been hesitant to move too quickly to adjust policy based on a limited set of data.

Inflation, while improving, remains uneven and bumpy at best. With three months of accelerating price pressures at the start of the year, at this point, two months of more favorable data in?May and June is not enough to justify a change in policy, at least not yet. That’s not to say the Fed can’t or won’t cut rates before the end of the year, but first there needs to be considerably more unquestionable improvement in the July and August data.??

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The market, meanwhile, continues to anticipate a nearer-term rate cut with the probability of a July rate cut still minimal at 7%, while the probability of a rate cut in September is now priced in at 96%.

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Also yesterday, initial jobless claims fell 17k in the week ending July 6, the lowest since May. The four-week average, meanwhile, declined from 239k to 234k. Continuing claims, or the total number of Americans claiming ongoing unemployment, fell from 1.83M to 11.84M in the week ending June 29.

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Also today, the University of Michigan Consumer Sentiment Index unexpectedly fell from 68.2 to 66.0 in the preliminary July report, an eight-month low. According to the median forecast, the index was expected to rise to a reading of 68.5. In the details of the report, a gauge of current conditions fell from 65.9 to 64.1, and a gauge of future expectations declined from 69.6 to 67.2 in the preliminary July report, the lowest reading since November.

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Next week, the economic calendar begins on Monday with the July Empire Manufacturing Index, ahead of the first of the key releases this week – June retail sales.

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Retail sales rose 0.1% in May, falling short of the 0.3% gain expected and following a downwardly revised 0.2% decline in April. Over the past 12 months, retail sales rose 2.3% in May, the smallest annual gain in three months. In June, retail sales are expected to decline 0.2% for the month, potentially marking the first monthly decline since January, still rising, however, 2.2% year-over-year – albeit potentially marking the weakest annual gain since February.

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Also on Tuesday, business inventories, import and export price indices for June, and the NAHB Housing Market Index for July ahead of weekly mortgage applications on Wednesday along with another key report of the week – June housing starts and permits.

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Last month, starts unexpectedly fell 5.6% in May and dropped 19.3% year-over-year, the largest annual decline since April 2023. Building permits, meanwhile, fell nearly 4% in May, and decreased 9.5% on an annual basis, the fourth consecutive month of decline. This month, starts are expected to rise 1.8% in June, and potentially drop 8.1% on an annual basis, following a 19.3% drop in May, while permits are expected to decline 0.1% in June, and fall 7.2% over the past 12 months, potentially marking the fifth consecutive month of decline.

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On Thursday, weekly jobless claims, the July Philly Fed Business Outlook Index, and the June Leading Indicators Index.

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On the Fed-speak front, the robust Fed-speak continues next week with several members taking to varies stages across the country, no doubt expanding on the latest changes in the Fed’s outlook for a reduced level of rates amid still heightened inflation, as well as offering an updated assessment of conditions in light of a weaker than expected read on June inflation and a cooling in labor market conditions.?

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Included in next week’s speakers are Chair Powell, Governor Kugler, Dallas Fed President Lorie Logan, along with Governor Bowman, New York’s Williams, and Atlanta Fed President Raphael Bostic.

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Finally, backing up to Wednesday, the Fed will release the latest version of the Beige Book likely underscoring that economic activity continue to “expand,” but that “conditions varied across industries and Districts.”

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-Lindsey Piegza, Ph.D., Chief Economist

Link to report: https://www.bls.gov/news.release/ppi.nr0.htmProducer Price Index News Release summary - 2024 M06 Results www.bls.gov