Another key inflation gauge fell sharply in May
US inflation at the wholesale level has cooled once again. Pictured is the General Motors electric vehicle assembly plant
By Alicia Wallace, CNN
Minneapolis (CNN) — US inflation at the wholesale level has cooled once again, this time landing well below its pre-pandemic average.
The Producer Price Index showed that annual price increases seen by producers measured 1.1% for the 12 months ended in May, easing sharply from the 2.3% bump recorded in April, according to data released Wednesday by the Bureau of Labor Statistics.
Driven by a decline in energy prices and food prices, this inflation measure has now decelerated for 11 consecutive months. It’s now at its lowest annual reading since December 2020, when post-pandemic demand was starting to return and producer prices were beginning their upward inflationary march.
On a monthly basis, prices fell 0.3%, the fourth drop in six months.
“Businesses may still use unyielding consumer demand as support for price hikes, which will keep inflation from falling more rapidly through the remainder of this year, but recent months’ PPI results suggest that the supply side of the inflation equation has been all but solved for producers,” Kurt Rankin, senior economist for PNC Financial Services Group, noted Wednesday.
Potential relief for consumers
The PPI is a closely watched inflation gauge, since it captures average price shifts upstream of the consumer. It’s viewed as a potential leading indicator of how prices could eventually behave at the store level.
“Producer prices are one example of inflation being more transitory than economists predicted,” FwdBonds economist Chris Rupkey wrote in a note Wednesday. “The numbers don’t lie. The decline in PPI prices spells relief for inflation-weary consumers.”
Economists were expecting a reading of 1.5% for the 12 months ended in May and a month-on-month retreat of 0.1%, according to Refinitiv estimates.
Stripping out the more volatile categories of energy and food, the core PPI index showed that prices increased 0.2% from April and moderated to 2.8% on an annual basis.
The May PPI report is the second piece of good inflation news in a two-day span: On Tuesday, the Consumer Price Index showed that inflation eased to 4% on an annual basis in May.
What this means for the Fed
The latest PPI lands just hours before the Federal Reserve is scheduled to announce its latest monetary policy action.
Market participants anticipate that Fed officials will opt for a pause to evaluate the impacts of the central bank’s 10 consecutive interest rate hikes since March 2022 in addition to other financial and economic developments.
The three major inflation gauges released by the government — CPI, PPI and the Federal Reserve-favorite Personal Consumption Expenditures index — have cooled significantly since last summer’s inflation peak.
Given those developments, the Fed should consider pausing in July as well, Rupkey noted.
“We can’t keep getting inflation data like this and maintain inflation is out of control,” he wrote. “Inflation is moderating, that’s the bottom line, and that means Fed officials can take the summer off from the spate of rate hikes delivered at every meeting since last March.”
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