Producer Prices Expected To Slow In May

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The monthly producer prices index data will be released today. Estimates are pointing to a slower pace of price gains which measures inflation at the factory gate.

The headline producer prices index is forecast to rise 2.0% on the year, marking a slower pace of growth from the yearly gains a month before. The Core producer prices index is also forecast to slow to a pace of 2.3%.

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The declines in the producer prices come as economists expect the effects of higher fuel costs to fade.

Producer prices data lead the consumer price index data by a few months. Although PPI has been steady above the 2.0% threshold, the prospects of a decline from this level are starting to increase.

U.S. PPI Final Demand
U.S. PPI Final Demand

This could potentially see consumer prices turning weaker as well. Besides the global trade tensions, inflation also remains one of the key issues for Fed officials.

The FOMC will be holding its monetary policy meeting next week. Therefore, today’s producer prices index data along with the consumer price index data due tomorrow will be closely watched.

The recent patch of weak economic reports is raising prospects of a rate cut from the Fed this year. The probability for rate cuts in June, September, and December has increased. But there is a higher chance that the Fed could cut rates by 25 basis points in September or December this year.

This will potentially mark an end to the interest rate hike regime following the end of the Fed’s QE program in the aftermath of the 2008 global financial crisis. The Fed has already ended its treasury unwinding program.

US Producer Prices Grew Steadily in April

The producer prices index data for April showed steady growth, marking one of the quickest paces of increase since this year.

Data showed that headline producer prices grew at a rate of 2.2% on an annual basis in April. This was the same pace of growth as the month before on a yearly basis. The data was, however, short of the median estimates forecasting a 2.3% increase on the year.

Most of the gains in the producer prices came from higher fuel costs. Petrol prices rose 5.9% on the month. Besides fuel prices, a measure of other goods also surged during the month.

The price of vegetables posted a drag, falling 11.6% on the month.

Excluding the volatile food and energy prices, core producer prices index rose 2.4% on the year in April. This was also shy of the median estimates of a 2.5% increase, but the pace of growth was steady from the month before on a yearly basis.

On a month over month basis, core PPI rose 0.4% in April, marking one of the quickest gains in the underlying price measures.

Wholesale energy prices grew 1.8% in April, slowing from a 5.0% increase in March. Prices of goods grew 0.3% in April, gaining from the 0.1% increase from the month before.

Cost of services grew a modest 0.1% in April while core goods prices were unchanged after gaining 0.2% in March.

Data to Give More Insight Into Inflationary Pressures

Today’s PPI data will no doubt give more insight into how price pressures are building up at the factory gate. An increase in the PPI, more than the estimates could see consumer inflation likely to rise over the coming month or two.

The higher tariffs from goods imported from China could spell an increase in prices of raw materials. The markets are yet to see the ground reaction following the latest tariff hikes on good imported from Mexico.

As a result, investors could take this data with a pinch of salt. The full effects of the tariffs hikes on China and Mexico are yet to be fully priced into the monthly data.

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