In July, the PPI jumped up by 0.9%. Produced by the Bureau of Labor Statistics, this index tracks the prices of final demand goods and services. This increase blew past the Dow Jones prediction of a small 0.2% increase. The PPI is increasing largely because of underlying inflationary waves still rolling through the economy. The index’s structural changes are adding to this upward pressure—and here’s how.
On a year-over-year basis, the PPI was up 3.3%, the biggest jump since February. This figure is 3.8 percentage points above the Federal Reserve’s target inflation rate of 2%. The July report marks the first release since the Bureau of Labor Statistics eliminated approximately 350 categories from its detailed count of input costs, potentially impacting future comparisons.
PPI of core wholesale prices, minus food and energy prices, jumped by 0.9%. This jarring spike completely outstripped expectations, which had expected only a 0.3% increase. This central measure illustrates that inflation is spreading beyond volatile sectors such as food and energy. Its reach is even more expansive, affecting any service or good that is around $1,000.
Services inflation was up a shocking 1.1%, accounting for nearly two-thirds of the PPI increase. This is the biggest monthly increase since March 2022. Most significantly, trade services margins spiked a record 2%, leading combined index price advances in the trade sector. Additionally, machinery and equipment wholesaling alone accounted for 30% of the services inflation increase, reflecting robust demand in this sector.
The core PPI, which excludes food, energy and trade services, was up 0.6%. Notably, this 10-point jump is the largest positive net change for this index since March 2022. This only underscores the idea that inflation is widespread and everywhere, not confined to particular categories.
“The large spike in the Producer Price Index this morning shows inflation is coursing through the economy, even if it hasn’t been felt by consumers yet.” – Chris Zaccarelli, chief investment officer at Northlight Asset Management
Market analysts are deeply troubled by these numbers. This is particularly disconcerting after the last few months of Consumer Price Index (CPI) reports showing a sign of a less inflationary environment. Given PPI’s surprise increase, some economists are now arguing that the optimism around soon-to-come interest rate cuts is misplaced.
“Given how benign the CPI numbers were on Tuesday, this is a most unwelcome surprise to the upside and is likely to unwind some of the optimism of a ‘guaranteed’ rate cut next month.” – Chris Zaccarelli, chief investment officer at Northlight Asset Management