The PPI Index That Shows Businesses Raising Prices
With the Consumer Price Index (CPI) already at a three-year high, one key question is whether—and to what extent—businesses will begin passing along the price pressures they're feeling, including higher energy costs.
Producer Price Index (PPI) data due out June 11 (a day after May CPI data) will offer a look. April's data raised eyebrows. It wasn't just that PPI for final demand rose 6% year over year—the most in more than three years—or that core PPI, which excludes food and energy, jumped 5.2% annually, also the highest in three years.
More than half of the increase in headline PPI was driven by services, which rose 1.2% from a month earlier. And two-thirds of that increase was attributed to a 2.7% jump in trade services—that is, changes in margins for wholesalers and retailers.
In other words, the PPI trade services index indicates the degree to which businesses are passing higher prices down the supply chain. In April, the answer was clear: the highest level since at least 2010, as far back as the data goes.
Data sources: St. Louis Federal Reserve, Bureau of Labor Statistics
For illustrative purposes only.
No doubt, one strong reading does not make a trend. Trade services data is relatively volatile, and the index isn't a perfect measure of inflation pass-through. But another strong reading for May would offer additional evidence that businesses are passing along price increases at a time when higher oil prices, tariffs, and other factors are creating upstream price pressures.
Of course, a full reopening of the Strait of Hormuz could deflate energy-price pressures relatively quickly. But energy isn't the only driver of the current inflation surge. Goods inflation has picked up even when excluding energy products. Wholesale prices for goods excluding food and energy rose 4.6% year over year in April. And services inflation has not fully returned to pre-COVID-19 levels, remaining a lingering concern for the Federal Reserve's inflation outlook.
So, in addition to the headline CPI and PPI numbers this week, here are some key numbers to watch for signs that higher prices are moving downstream:
- PPI final demand services. Services inflation tends to be stickier than goods inflation, so another strong reading could concern the Fed.
- PPI trade services. An indicator of inflation "pass-through."
- PPI transportation and warehousing. These prices, sensitive to energy costs, feed into a range of goods.
- PPI goods excluding food, energy, and trade services. Often considered the PPI's "cleanest" picture of core inflation.
Together, they'll offer a clearer picture of inflationary pressures in the pipeline and clues as to whether businesses feel they can (or must) pass price increases along to consumers.
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