By: Adrian Moore – Forex Focus
The seasonally adjusted index rises by 0.3 percent after surging 0.5 percent in May.
The seasonally adjusted US Producer Price Index (PPI) advanced 0.3 percent in June after registering a 0.5-percent rise the previous month, according to information published by the US Bureau of Labor Statistics. On an annual basis, the unadjusted final demand for goods surged 3.4 percent, the largest increase since November 2011 and higher than the 3.1 percent reported in May. The June PPI data beat market expectations of a 0.2-percent increase for the month and 3.2-percent growth for the 12-month period. The month-on-month core index, which excludes food, energy and trade services, also edged up by 0.3 percent from 0.1 percent in May. Prices for motor vehicles, diesel fuel, industrial chemicals, electric power and fresh fruits surged, while price declines were seen in residential natural gas, pharmaceutical preparations and fresh, dry vegetables.
The PPI data is released every month and measures the final demand for commodities wholesaled for capital investment, government, personal consumption and exports. The index typically comprises the final demand for six major price indices: goods including food and energy, trade services, transportation and warehousing, construction, services excluding trade, transportation and warehousing services, and total final demand.
The upsurge in the June numbers was led by an increase in the final demand for services and goods. The services index edged up from 0.3 percent in May to 0.4 percent in June, the largest increase since January of this year, due to a 21.8-percent jump in the retail index for fuels and lubricants. In addition, indices for outpatient care in hospitals, retail outlets catering to automobiles, automobile parts and food, freight transportation, health, beauty and retailing in optical goods moved up, while indices representing inpatient care, apparels, footwear and airline-passenger services declined.
The final demand for goods edged 0.1 percent higher in June, after spiking 1.0 percent in May on the back of a 0.8-percent rise in the final demand for energy and a 0.3-percent increase in the final demand for goods excluding food and energy, offsetting a 1.1-percent fall in the index signifying the final demand for food.
Coming to intermediate goods, the final demand for processed goods spiked 0.7 percent, while the index for unprocessed goods dropped 1.0 percent in June. Final demand for intermediate services, in the meantime, edged 0.1 percent higher during the same period.
The intensifying Producer Price Index is leading to a cascading effect on consumer inflation, with the retail inflation numbers in June rising 0.1 percent month-on-month, after a 0.2-percent increase in May. For the 12-month period, inflation edged up to 2.9 percent, the highest since February 2012, as prices of oil, gasoline, food and medical care advanced higher, pushing up core inflation to a 17-month high of 2.3 percent.
With producer prices rising at the fastest pace in more than six years in June, higher than what most analysts predicted, the recent tariffs on steel, aluminium and lumber imports will only cause the underlying inflation to advance further. The benchmark inflation numbers in the United States were already showing signs of heating up, even before the announcement of import tariffs in March, leading the Federal Reserve to raise interest rates by 25 basis points in December 2017 and March 2018 respectively. However, the imposition of steel and aluminium tariffs in addition to the ongoing trade conflict with China is only going to speedily escalate underlying inflationary pressures in the country, forcing the Federal Reserve to hasten its interest-rate hiking cycle. The Federal Open Market Committee is expected to hold another four monetary-policy meetings this year, and economists expect interest rates in the US to rise by at least another 50 basis points by the end of the year.