Unexpected bad news for inflation: Wholesale prices rose in June

(CNN) — Wholesale price inflation unexpectedly accelerated in June to its highest rate since March 2023, according to new data released Friday.

On the surface, the jump in PPI appears to be an unwelcome development for the US economy and the fight to rein in high inflation — and it appears especially jarring landing one day after the BLS announced that consumer prices fell on a monthly basis for the first time in four years.

However, economists caution that monthly data — and especially the category that drove PPI higher in June — can be erratic, and that the unexpected jump in PPI isn’t likely a worrisome sign of any broader inflation pressures building in the pipeline.

The June increase was attributed to a sharp rise in final demand services, specifically trade services margins, which soared 1.9% from May and offset lower energy prices and still-falling goods production prices.

It’s the largest monthly increase for trade services since March 2022.

“The increase was broad-based among wholesalers and retailers of fuel, autos and other goods, but almost certainly is not the start of a resurgence in margins,” Ian Shepherdson, chairman and chief economist for Pantheon Macroeconomics, wrote in a note to clients on Friday. “The data are volatile and often revised a lot. Margins will come under increasing pressure as growth in consumers’ spending continues to slow.”

Economists had expected that prices would increase 0.1% on a monthly basis and hold steady at 2.2% annually.

Looking past the volatility and at the ‘core core’

PPI often is looked to as a potential bellwether for retail-level inflation in the months ahead.

Increased margins make the public think of corporate greed and higher costs that are being passed along to consumers by middlemen that are making a profit along the way, said Chris Rupkey, chief economist with FwdBonds.

“It does not sound good, but we don’t think consumers are getting ready to be hit by a new surge in price increases just because margins are going up,” Rupkey wrote in an email reply to a CNN Business query. “These margins are notoriously difficult to measure, and wholesalers do have their own costs to cover.”

When stripping out energy and food-related prices, core PPI jumped 0.4% for the month, rising 3% annually, its highest rate since April 2023.

However, to better eliminate the influence of the volatile trade services, economists also look at a “core core” reading, Andreas Hauskrecht, clinical professor of business economics, at Indiana University’s Kelley School of Business, said in an interview.

“So the ‘core core’ is without energy, without food and without the trade, because we think this is volatility and pricing that has no direct link with monetary policy, and we try to clean up the data so that we really see a trend,” he said. “And so I wouldn’t stress too much about the trade index.”

In June, the PPI excluding energy, food and trade was flat for the month and on an annual basis slowed to 3.1% from 3.3% in May, BLS data show.

Inflation still ‘dying on the vine’

For US consumers, inflation has been trending in a desired direction during the past couple of months. Despite a brief flare-up of price hikes in the first quarter of the year, which ultimately delayed the Federal Reserve’s plans for interest rate cuts, inflation has cooled considerably during the following three months.

On Thursday, the US economy got more good news in the latest Consumer Price Index, the most widely used inflation gauge that measures the average price changes for commonly purchased goods and services. Prices dropped on a monthly basis for the first time since May 2020, and annual inflation slowed to 3%, its slowest rate since June 2023.

The June PPI doesn’t reflect a shift in inflation’s slowing trajectory, Rupkey said.

“We think core [Personal Consumption Expenditures] inflation for June is still likely to be either unchanged or the same modest 0.1% increase it was in May,” he said, referencing a closely watched inflation gauge. “Inflation still looks to be dying on the vine in large part because commodities and goods price increases have moderated.”

The Fed bases its 2% target on the headline PCE index and has increasingly scrutinized the core PCE index for underlying inflationary trends.

Energy-heavy transportation and warehousing operations saw prices fall in the early and final purchasing stages of their business, PPI data showed. That indicates that supply-side pressures are easing, Kurt Rankin, senior economist with PNC Financial Services, wrote Thursday.

“The downward-trending energy PPI pace, which lies at the root of all price pressures in the US economy, implies that the second half of 2024 will see diminishing cost pressures from producers’ own energy bills, as well as the cost of shipping goods to retailers,” Rankin wrote.

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