By Orbex

The monthly producer prices index report will be coming out today. Economists forecast that the producer prices index will rise for a third consecutive month. On a month over month basis, core PPI is expected to advance 0.2%. This marks the same pace of increase as the month before.

Headline producer prices index are forecast to rise 0.1% on the month, rising at the same pace as the month before. On a year over year basis, headline PPI is expected to rise 2.0% in the twelve months ending June. This marks a modest increase from the 1.8% gains in May.

Core PPI rate is expected to hold steady, rising at the same pace of 2.3% as it did the month before.

Today’s PPI data could potentially signal an increase in consumer prices in the coming months. This could have an impact on the Fed’s current dovish view on monetary policy.

US Producer Prices Index Rises for 2nd Month

The producer prices index data posted gains for the second consecutive month. The boost came with a surge in the cost of hotel accommodation. There were also broad-based gains in other services. The data indicated a steady uptick in underlying inflationary pressures at the factory gate.

Data from the US Labor Department showed that the headline PPI could in fact support the case that consumer inflation is transitory. However, this remains to be seen if the inflation at the factory gate will propagate to the consumer side.

The core producer prices index which excludes the volatile food, energy and trade services grew 0.4% on the month. This was the same pace of increase comparing to April.

On a year over year basis, core PPI rose 2.3% in May, up from 2.1% increase from April.

The services sector contributed to an increase in inflation. This could potentially translate to higher inflation coming out for the month of June on the consumer side.

There were some weaknesses in price pressures on the energy and food side. But these offset the increase in the services sector. The producer prices for final demand grew 0.1% on the month in May. This was a slight decline from the 0.2% increase in April.

Headline inflation at the factory gate grew 1.8% on a year over year basis. This was a slower pace of increase following April’s gain of 2.2%.

Wholesale energy prices were down 1.0% on the month following the 1.8% gains previously. Prices of goods fell 0.2% during the month following April’s increase of 0.3%. The core goods prices were left unchanged for the second consecutive month.

Impact of the US Producer Prices

Today’s PPI report is unlikely to move the markets much. But the implications of this can be felt in the Fed’s upcoming monetary policy meeting. The markets are expecting to see a rate cut announcement from the Fed at the July FOMC meeting.

However, a better than expected increase in producer prices could keep the officials cautious instead of following through with the rate cuts. Adding to the above view, the recent ISM’s manufacturing PMI report also indicates a possible increase.

The ISM prices paid index showed an increase from 55.4 in May to 58.9 in June. The pace of increase was seen to be faster. Prices of various commodities, including gasoline, fuel and diesel fuel were seen rising during the month.

The increase in fuel prices is supported by the view that oil prices posted sharp gains during the month. This could lead to higher than expected headline PPI. However, it will take a while for the gains in the price pressures to be shifted to the consumer side.

By Orbex