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Why There Could Be More Room for Inflation Growth

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Producer price index increased in May

The US Bureau of Labor Statistics releases a monthly report that tracks price trends in wholesale markets. The PPI (producer price index) is constructed using the inputs of a monthly survey of industries in the manufacturing sector (XLI). The survey consists of questions that determine changes in raw materials prices, production levels, and finished goods.

The PPI for final demand in May is reported to have increased by 0.5% month-over-month, a sharp improvement from the 0.1% growth reported in April. In May, the final demand index had risen 3.1% in the last 12 months, the largest 12-month increase since January 2012.

A closer look at the May PPI report

The 0.5% increase in the PPI matches the largest monthly increase in the last five years, signaling that the trend of rising prices has not run out of steam. In the last 12 months, producer prices have increased by 3.1%, the largest 12-month increase since January 2012. The key contributor to the price increase at the producer level was energy (XLE) prices, which rose 4.6% in May. There were also marked increases in input prices for trade services, transportation (IYT), and warehousing services.

PPI increase signals further room for inflation growth

An increase in producer prices usually translates to higher prices for finished goods, which could lead to a price increase for consumers. In its June statement, the Federal Reserve reiterated that it would not overreact to inflation (TIP) overshooting the 2% target.

However, looking at the recent trend in prices, inflation could continue to increase in the months ahead and could push the Fed toward a faster pace of rate hikes (BND). This increases the chances of a fourth rate hike in 2018, as the Fed will likely want to stay ahead of the curve rather than fall behind.

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