US Producer Inflation Tops Expectations

American producer price growth topped expectations in June amid gains in the prices of services and motor vehicles, resulting to the biggest annual increase in 6 and half years.

The Labor Department published the report on Wednesday.  It showed acceleration in underlying producer inflation last month.  Economists estimated tariffs on lumber, steel, and aluminum imports to drive up prices, possibly keeping the Fed Reserve on track to hike interest rates two more times this year.

“With underlying inflationary pressures building even before the tariffs, we suspect the Fed will be forced to continue raising rates once a quarter,” stated Michael Pearce, who is senior US economist at Capital Economics in New York.

The producer price index for final demand gained 0.3 percent last month after it similarly increased in May.  This pushed the annual increase in the PPI to 3.4 percent, which is the largest rise since November 2011, higher than the 3.1 percent recorded in May.


Producer price index inflation grew faster than expected

Economists that participated in a survey had predicted the PPI to jump 0.2 percent in June and gaining 3.2 percent year-on-year.

A key measure of underlying producer price pressure that doesn’t include food, energy, and trade services soared 0.3 percent last month.  The so-called core PPI edged up 0.1 percent in May.

In the 12 months through June, the core PPI increased 2.7 percent after rising 2.6 percent in May.

There were gains in the price of materials used in manufacturing and construction.  This was a sign that the duties on steel and aluminum imports were spurring prices.

US President Donald Trump imposed tariffs to protect domestic industries from what he claims to be an unfair competition from foreign manufacturers.  Major trade partners, which include China, the European Union, Canada, and Mexico have retaliated using tariffs of their own.

During the previous week, the Trump administration imposed 25 percent tariffs on $32 billion of Chinese imports, eliciting a prompt response in kind from China.  Last Tuesday, Trump warned that he could slap an additional 10 percent tariff on $200 billion of Chinese goods.

Price for iron, steel, and softwood lumber products as well as nonferrous metal products grew in price in June.

“Since the PPI covers the price of domestically produced goods, these gains represent US producers raising prices behind the tariff wall or the impact of higher input costs,” stated John Ryding, who is chief economist at RDQ Economics in New York. “We expect these price pressures will flow through into higher core inflation at the consumer level as the year unfolds.”

Increasing Prices

Manufacturers have been facing an increase in the costs of inputs, though they so far have not passed on the increases to consumers. Inflation is steadily rising in the midst of a labor market that is considered to be close to full employment.

Meanwhile, the personal consumption expenditures (PCE), which is the Fed’s preferred inflation measure, reached the US central bank’s 2 percent target in May for the first in six years.  The Fed raised interest rates in June for the second instance this year, while forecasting two more rate hikes by the end of 2018.

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