Producer prices ease as energy costs fall

REAL ECONOMY BLOG | September 14, 2022

Authored by RSM US LLP

Prices paid to domestic producers deflated for the second month in a row as energy prices continued to fall and food prices remained unchanged.

August’s producer inflation index for final demand fell by 0.1% from July, according to data released Wednesday by the Bureau of Labor Statistics. On a year-ago basis, producer price inflation declined to 8.7% from 9.8% in July.

Core inflation, however, which strips out more volatile food and energy costs, accelerated from July, rising by 0.4%. This increase was in line with the consumer price index released on Tuesday, suggesting that inflation continued to be stubbornly high.

The core inflation number was more than double the average monthly inflation target, which is a little less than 0.2%.

The data reaffirms our forecast for another jumbo rate hike of 75 basis points next week as the Federal Reserve has made clear that it won’t stop being aggressive in its rate hikes until inflation is meaningfully under control.

The faster growth rate of core inflation was driven by service producers, which rose by 0.4% on the month. Services account for more than 65% of the total basket used to calculate inflation.

Within services, prices paid for trade services, a proxy for retail and wholesales margins, remained elevated in August, rising by 0.8%. For the four months of summer, the average margin growth was 0.75%. Given the solid growth in service spending in the summer, retail and wholesale pricing power remained strong.

On top of that, input prices showed some continuing signs of relief as intermediate materials less food and energy fell by 1.9% on the month, following a 2.4% drop in July.

But unlike July, when the declines in input prices were broad-based, there were categories in August that showed significant price gains like unprocessed intermediate products less agriculture products, which rose by 10.1%.

The mixed signals only highlighted how sticky and complicated inflation continues to be.

The takeaway

While the top-line number showed some improvement in producer inflation, the details were not as rosy, continuing to keep the economy far from bringing inflation down to the target level. That means there is more work awaiting the Fed to put inflation meaningfully under control.