After a year of torrid inflation, US inflation made the first steps towards turning the corner in May, indicating a dramatic change for the US economy. The PPI measures the average change over time in the selling prices received by domestic producers for their output. It was still positive, indicating a growth of 0.1% this month. The annual rate of PPI shot up to 2.6%. This is the first time this has been reported by the Bureau of Labor Statistics. Wall Street economists were expecting an even bigger increase of 0.2% from April. They had anticipated upward inflationary pressures among producers.
The PPI’s rise in May marks a turnaround from April’s decline, where the index experienced a 0.2% drop. The decline largely occurred as a result of wholesalers and retailers increasing margins were squeezed. This challenging economic environment was largely shaped by elevated tariffs imposed by the former Trump administration. The April figures triggered panic among economists. They painted a dreadful picture of continuing price increases, inflaming fears that we were about to experience a new era of sustained inflation.
Even a few economists were betting on May, as the month inflation would finally begin rising. They supported this forecast on the strong labor market and the pent-up demand for goods and services. The annual rate of 2.6% is exactly what economists projected. They had forecasted an identical rise for the year through May.
US wholesale inflation rose by a more robust than expected 0.6%. Last week’s Consumer Price Index (CPI) report came in with overall inflation for goods and services increasing less than feared. This gap indicates that producers are experiencing higher costs. Those costs have not even come close to showing up in increased consumer prices.
The PPI serves as a potential indicator of future retail-level inflation, providing insights into how price changes at the wholesale level may impact consumers down the line. Even economists are stunned by how bad it’s gotten. They explain why PPI trends can be misleading harbingers of increasing inflation, as the consumer price increase might be affected in multiple ways.
President Trump’s tariffs, implemented as part of his broader trade policy, are expected to contribute to eventual price increases for consumers. These tariffs have forced producers to incur additional costs. Consequently, they can afford to charge more to consumers.