Wholesale prices in the United States rose by a larger-than-expected 2.6% last month from a year earlier, a sign that some inflation pressures remain high.
The increase, the sharpest year-over-year increase since March 2023, comes at a time when other price indicators are showing that inflation has continued to ease. The Labor Department said Friday that its producer price index – which tracks inflation before it reaches consumers – rose 0.2% from May to June after being unchanged the month before.
Excluding food and energy prices, which tend to bounce around from month to month, so-called core wholesale prices increased 0.4% from May and 3% from June 2023. The increase in wholesale inflation last month was driven by a sizable 0.6% rise in services prices, led by higher profit margins for machinery and auto wholesalers.
By contrast, the overall prices of goods fell 0.5%. Gasoline prices tumbled 5.8% at the wholesale level. Food prices also dropped.
The producer price index can provide an early sign of where consumer inflation is headed. Economists also watch it because some of its components, notably healthcare and financial services, flow into the Federal Reserve’s preferred inflation gauge – the personal consumption expenditures, or PCE, index.
Following the government’s report on Thursday that consumer inflation eased for a third consecutive month in June, Friday’s wholesale figures were released. Consumer prices fell by 0.1% from May to June – marking the first overall inflation drop since May 2020, when the pandemic brought the economy to a standstill.
This week’s price figures, along with other recent data, continue to indicate a sustained slowdown in the inflation that initially gripped the country three years ago. This was when the economy rapidly recovered from the pandemic recession, resulting in severe supply shortages and skyrocketing prices.
In an attempt to control the price surges, the Fed increased its benchmark interest rate 11 times in 2022 and 2023, reaching a 23-year high. Inflation has since cooled from its four-decade peak of 9.1%, and it is widely anticipated that the central bank will start reducing interest rates in September.
Bill Adams, chief economist at Comerica Bank, commented: “The big picture is that inflation pressures have moderated over the last two years but are still a bit stronger than the Fed would like them to be. With the economy operating in low gear, the Fed thinks the right time to start cutting interest rates is close. But they are planning to cut gradually.”
Over time, rate cuts by the Fed are likely to result in lower borrowing costs for mortgages, auto loans, credit cards, and business borrowing, and could also stimulate stock prices. A brief surge in inflation earlier this year led Federal Reserve officials to reconsider their plans for interest rate cuts.
They stated that they would need to witness several months of modest price increases before feeling confident enough to reduce their key rate from its 23-year peak. Despite the general slowdown in inflation, the costs of essentials such as food, rent, healthcare and other necessities are still significantly higher than pre-pandemic levels.
This has become a source of public dissatisfaction and could potentially jeopardise President Joe Biden’s chances of re-election. However, despite the persistent inflation pressures and increased borrowing costs, the US economy remains stable, albeit gradually slowing down. Employment rates remain strong and unemployment is relatively low, providing Americans with an unusual level of job security.