The wholesale cost of U.S. goods and services rose in May for the first time in four months. Producer price inflation (PPI) is a leading indicator of consumer inflation, making it a closely watched metric even in normal circumstances. PPI rose 0.4% in May vs. 0.1% gain expected and after plunging a record 1.3% the month before. In the 12 months through May, PPI came in at 0.8% decline, up from 1.2% decline in April.
- Producer prices rose 0.4% vs. 0.1% gain expected in May, breaking a three-month streak of declines.
- Annual PPI fell 0.8% vs. 1.2% decline the month before, and core annual PPI came in at -0.4% vs. -0.3% the month before.
Food and energy costs rebounded in May, with energy climbing 4.5% after falling since February amid reduced demand for oil due to coronavirus lockdown procedures. Food costs rose 6% in May. Core PPI, which eliminates food and energy, rose a more modest 0.1% overall last month. Meanwhile, annual core PPI fell to -0.4% vs. -0.3% the month before. While the rebound in energy prices was in line with expectations, gains in food and other categories were less so.
Food costs rose partly due to increased demand for food cooked at home due to the collapse of the labor market impacting buying power, as well as general quarantine restrictions preventing people from eating out. Production costs also rose due to the impact of the coronavirus on food processing facilities, with global supply chains severely disrupted.
May consumer prices were weak but producer prices surprised to the upside, following 3 monthly declines. Higher prices for food and #energy led the gains but inflation is non-existent and interest rates muted. Real average hourly #earnings are rising but not for the best reasons. pic.twitter.com/BPbAffy4TJ
— Dr Thomas Kevin Swift (@DrTKSwift) June 11, 2020
While the US economy began to reopen in May, goods-producing industries are still under pressure as a result of the ongoing pandemic, and if rising prices continue, it’s likely that they’ll need to pass those costs on to the consumer, leading to general economic inflation.
Gold prices last traded at $1,737.43/oz, up 0.01% on the day but recovering from earlier losses following the release of the report. Spot gold has seen a daily high of $1,739.42/oz and a low of $1,712.94/oz.
PPI may have recovered on a monthly basis, but remains negative on an annual basis, meaning it’s too soon to use the latest report as an indicator of trending inflation in either producer or consumer prices. However, the financial markets have tentatively reacted on the assumption that the rise in prices may continue, creating a bullish environment for risk-off assets like gold. The stock markets dropped on Thursday amid concerns over the growing number of coronavirus cases as well as downbeat comments from Fed Chairman Jerome Powell.