Data released on Thursday showed that a widely followed measure of wholesale inflation increased more than expected in August. This was likely due to rising energy prices, even as underlying price pressures continue to lessen.
Inflationary pressures, as measured by the Department of Labor’s producer pricing index (PPI), increased by 0.7% in the most recent month. That was more than double the predicted 0.4% growth, making it the highest monthly increase since June.
The PPI rose 1.6% in the 12 months through August, down from 1.8% in the 12 months through July.
Energy prices rose by 10.5% month-over-month, with gasoline prices rising by 20%. The so-called core PPI increased by 0.2% in August, which was in line with predictions. This figure excludes the highly volatile food and energy categories.
The 2.1% annual drop in the core PPI from January 2021 shows that producers are facing less pressure from rising non-food costs.
The CPI report released on Tuesday revealed that annual headline inflation dropped to 3.7% from 4% in July. Excluding food and energy, the core CPI came in at 4.3%, down from 4.6% before.
The CPI and PPI both show that inflation is beginning to fall off the 40-year highs seen earlier this year, but that overall price rises are still uncomfortably high for consumers and businesses alike.
Last month’s greatest monthly increase in final demand goods prices was 2% in August, more evidence of persistently high inflationary pressures. However, services price inflation fell to 0.2% month-over-month.
Stock index futures continued to show slight increases Thursday morning despite the PPI announcement. The information is not likely to cause the Federal Reserve to change its monetary policy stance.
Central bank officials have been actively raising interest rates to prevent price increases while closely monitoring inflation measures like the PPI and CPI. At its policy-setting meeting next week, the Fed is widely anticipated to reduce the pace of rate hikes following a string of big boosts.
Fed Chair Jerome Powell has made it plain that lowering inflation to the 2% target remains a top priority for the central bank. To accomplish this, policymakers may need to maintain high interest rates for an extended period of time.
The data released on Thursday is unlikely to convince the Fed to slow down its rate hikes. There is some reason for optimism that the aggressive tightening effort is beginning to have an effect because producer price inflation has slowed, particularly in the core index.
Price pressures have been lessening across a variety of sectors, according to respondents in the Federal Reserve’s most recent Beige Book study of regional economic conditions, which has coincided with lower inflation readings.
Policymakers remain cautious about prematurely declaring victory against inflation. In particular, geopolitical unrest and domestic fuel supply dynamics are highlighted as remaining threats by the PPI’s energy component.
Retail sales for August climbed more than predicted, demonstrating that demand in the U.S. economy has been holding up better than thought. Inflation may not be brought under control for some time if demand holds steady.
However, the Fed appears to be on track toward a more neutral policy stance in 2023 if conditions permit, as underlying wholesale price hikes have shown positive deceleration. The slowing of core prices has given companies and consumers hope that the worst of inflation may be gone.