Producer prices in the US showed minimal growth this past June, with the annual increase in producer inflation worryingly reaching its lowest point in nearly three years. This provides further evidence that the economy is in real terms experiencing a period of disinflation, even as the labor market remains enduringly tight.
The latest report from the U.S. Labor Department, released last Thursday, follows the news that consumer prices saw a slight rise in June. The consistent trend of softer inflation readings is likely to bring the Federal Reserve closer to concluding its aggressive monetary policy tightening campaign, which has been the most rapid since the boom-and-bust heydays of the Reagonomic 1980s.
It is widely expected by experts that the U.S. central bank will in fact raise interest rates later this month, after keeping them steady in June.
UNDER PRESSURE
Bill Adams, the chief economist at Comerica Bank in Dallas, commented, “The Fed’s expected hike at the end of the month will probably be the last of the cycle. Things could still go wrong if another shock exerts new upward pressure on prices, but with the economy slowing and a modest margin of slack opening in its productive capacity, that seems less of a risk now.”
The producer price index for final demand inched up by 0.1% last month. Data for May was revised to show a 0.4% decline in the PPI, instead of the previously reported 0.3% decrease.
Over the 12 months through June, the PPI rose by 0.1%. This represents the smallest year-on-year gain since August 2020, following a 0.9% increase in May.
Economists familiar with the landscape surveyed by Reuters had anticipated a 0.2% increase in the PPI for the month and a 0.4% advance on a year-on-year basis.
Inflationary pressures are easing as supply chain bottlenecks dissipate and demand for goods slows in response to higher interest rates. Additionally, the surge in prices seen last year is no longer factoring into the calculation of annual inflation rates.
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COSTS ON THE RISE
Since March 2022, the Fed has raised its policy rate by 500 basis points. According to CME’s FedWatch tool, financial markets have priced in a 25-basis-point rate increase at the central bank’s July 25-26 policy meeting.
The 0.1% increase in the prices of services accounted for the rise in the monthly PPI last month. Services had also increased by 0.2% in May. The boost came from a 5.4% surge in deposit services, including checking and savings accounts.
There were also increases in the cost of food and alcohol retailing. Wholesale hotel and motel accommodation prices rose by 2.3%, while the cost of hospital inpatient care increased by 0.6%, and airline tickets rebounded by 1.1%. However, portfolio management fees dropped by 0.3%, marking a second consecutive month of decline.
These components of services contribute to the calculation of the Personal Consumption Expenditures (PCE) price indexes, which are the inflation measures monitored by the Fed for its 2% target.
The cost of transporting freight by road fell by 2.1% and experienced a year-on-year plunge of 13.7%, the most significant drop since 2010.
Goods prices remained unchanged after a 1.6% decline in May. Energy prices rebounded by 0.7%, while the cost of food fell for the third consecutive month. On a year-on-year basis, goods prices dropped by 4.4%, representing the largest decline since April 2020.
The deflation in factory goods and declining freight costs suggest that the economy is slowing down, potentially eliminating the need for the Fed to raise rates beyond this month.
Jeffrey Roach, the chief economist at LPL Financial in Charlotte, North Carolina, stated, “This is another positive report for investors desperate to see inflation dissipate.”
Stocks on Wall Street were trading higher, while the dollar fell against a basket of currencies. US Treasury prices rose.
SLOWDOWN IN CORE INFLATION
Excluding the volatile food and energy components, the core goods prices fell by 0.2% last month, following a 0.1% increase in May.
The narrower measure of core PPI, which excludes food, energy, and trade services components, inched up by 0.1% after remaining unchanged in May. Over the 12 months through June, the core PPI advanced by 2.6%. This represents the smallest year-on-year gain since February 2021, following a 2.8% increase in May.
With the Consumer Price Index (CPI) and Producer Price Index (PPI) data available, economists estimated that the core Personal Consumption Expenditures (PCE) price index rose by 0.2% in June. This would be the smallest increase since last November, following a 0.3% rise in May. The core PCE price index is forecasted to advance by 4.2% year-on-year in June, which would be the smallest rise since September 2021, after increasing by 4.6% in May.
While inflation is slowing down, the labor market remains tight. Another report from the Labor Department showed that initial claims for state unemployment benefits dropped by 12,000 to a seasonally adjusted 237,000 for the week ending July 8. Economists had projected 250,000 claims for the latest week.
The data includes the July 4 Independence Day holiday, which could have caused some distortions. Additionally, automakers typically idle plants in July for retooling purposes. However, these temporary plant closures do not always occur simultaneously, which can disrupt the government’s model used to remove seasonal fluctuations.
Claims, relative to the size of the labor market, are well below the 280,000 level that economists say would indicate a significant slowdown in job growth.
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LABOR DEMAND VS: SUPPLY
The Fed’s “Beige Book” report from Wednesday described labor demand as “remaining healthy” in June, with shortages reported in healthcare, transportation, hospitality, and high-skilled positions.
However, the report also noted that “some contacts reported that hiring was getting more targeted and selective.”
The number of people receiving benefits after the initial week of aid, which serves as a proxy for hiring, increased by 11,000 to 1.729 million during the week ending July 1, as shown by the claims report. The historically low level of claims suggests that some laid-off workers are quickly finding new employment.
Nevertheless, some economists have warned that the labor market could experience a significant slowdown by the end of the year, citing factory goods deflation and high borrowing costs as indicators of a potential recession.
Christopher Rupkey, the chief economist at FWD BONDS in New York, stated, “Deflation in core producer prices means demand is weak, so production cuts and the loss of new orders may eventually lead to belt-tightening and layoffs later on in the second half of the year.”
