Producer Prices Reaccelerate, Elevating Fed Rate Hike Bets
Energy drives a rebound in producer prices with the components feeding through to Core PCE coming in hot.
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All figures m/m unless otherwise noted. As a reminder, this report breaks prices down into two components, final demand goods (those which are then sold to retailers/wholesalers) and intermediate demand goods (which are in various stages of becoming final goods). All the headline numbers reported, news services quotes, etc., are final demand, but I’ll go through both separately.
This report is considered the “pig in the python,” particularly in terms of intermediate goods which by definition are still moving through the chain to final goods. If final goods prices move higher that either gets passed along to consumers (increasing CPI) or is eaten by companies (impacting margins).
QUICK SUMMARY
- Final demand producer prices rose 0.40% in August, the most since May but in line with expectations, after an upwardly revised 0.13% gain in July (initially reported as unchanged). Prices were up 5.41% from a year earlier, above the 5.3% expected.
- Energy snaps back. Final demand goods jumped 1.10%, the most since May, after two straight declines, with more than three-quarters of the gain from a 4.16% rise in energy — itself driven by a 24.1% surge in diesel fuel that accounted for over a third of the entire goods increase.
- Core was calmer. Excluding food and energy, producer prices rose a softer 0.16% (below the 0.3% expected) and 4.63% from a year earlier. Excluding food, energy, and trade services, prices rose 0.27% and held at 4.7% year over year.
- Services softened up 0.11%, with the entire gain from transportation and warehousing (up 2.26% on higher truck freight again linked to diesel). Trade services margins fell 0.24%, a second straight decline suggesting importers again absorbed rather than passed through tariff costs, and core-core services were essentially flat at 0.02%.
- The pipeline also re-accelerated. Processed goods for intermediate demand rose an elevated 1.77% and all four production-flow stages advanced after a flat-to-negative July, again led by energy.
- The Fed angle. Hot inputs to the Fed’s preferred inflation gauge — hospital care, airfares, and a record jump in legal services — lifted forecasts for August core PCE, with Goldman Sachs now at 0.24% month over month and BofA at 0.26%, leading markets to price roughly a 70% chance of a rate hike at the September 15–16 meeting.
— U.S. PPI Final Demand, August (month-over-month): 0.4% (estimate 0.4%; prior 0.0%; prior revised 0.1%)
— Final Demand (year-over-year): 5.4% (estimate 5.3%; prior 4.7%; prior revised 4.8%)
— Ex-Food and Energy (month-over-month): 0.2% (estimate 0.3%; prior 0.2%; prior revised 0.3%)
— Ex-Food and Energy (year-over-year): 4.6% (estimate 4.6%; prior 4.2%)
— Ex-Food, Energy and Trade (month-over-month): 0.3% (estimate 0.3%; prior 0.4%)
— Ex-Food, Energy and Trade (year-over-year): 4.7% (estimate 4.7%; prior 4.7%)
August final demand producer prices came in as expected at +0.40%, the most since May, a sharp reversal from two prior months of energy-driven deflation. It follows an upwardly revised +0.1% gain in July, which was initially reported as unchanged. On a year-over-year basis, final demand prices rose 5.41%, above the 5.3% expected and up from a revised 4.80% in July.
Goods prices jumped +1.10%, the most since May after two consecutive declines. More than three-quarters of the broad-based increase came from energy, which surged +4.16% after falling in each of the prior two months. Over a third of the entire goods increase traced to diesel fuel, which spiked 24.1% — a move Bloomberg flagged as a potential source of lasting price pain given tight distillate supply. Gasoline, jet fuel, home heating oil, candy and nuts, and tobacco products also rose. Residential electric power fell 0.5%, and fresh sausage and aluminum mill shapes also declined.
From a year earlier goods prices were +7.7% led by energy +24.4%.
Food prices edged up just +0.11% m/m and were up just +0.1% y/y.
Excluding food and energy, core goods prices rose +0.38%, the most since May. They are +5.1% y/y.
Beyond energy, the data-center buildout remained a source of pressure: electronic components and accessories rose 3.45% (chart), though computers and computer equipment advanced a more modest 0.2% and broader construction costs were essentially flat (−0.01%). Electronic components and accessories are now 27.6% y/y just off the record high in June.
Headline services (roughly 66% of the index) rose just +0.11%, the third consecutive increase. The entire advance came from a +2.26% rise in transportation and warehousing services (chart), itself led by truck transportation of freight, up 2.0%.
Headline services are +4.5% y/y.
Core-core services — core final demand services less the volatile trade, transportation, and warehousing component — were essentially flat at +0.02%. Airline passenger services, legal services, hospital inpatient care, and automobiles retailing contributed to the upside with legal services jumping 1.7%, the largest increase in data going back to 2009 (chart). On the downside, margins for fuels and lubricants retailing fell 11.3%, portfolio management moved lower, giving back part of July’s outsized 6.5% jump, and the indexes for health, beauty, and optical goods retailing; machinery and equipment wholesaling also fell.
Core-core services (one of the key metrics from this report reflecting underlying inflation) eased back to a still elevated +3.6% y/y.
Excluding food and energy from the headline, core final demand producer prices rose a soft +0.16%, below the 0.3% expected and near the bottom of its recent range. Core was up 4.6% from a year earlier.
Core producer prices still include the previously noted volatile trade services category (wholesaler and retailer margins), which offers evidence on tariff pass-through — falling margins imply prices are rising less than the cost to acquire goods, tariffs included. Trade services fell −0.24% in August, a second straight decline, indicating importers are again absorbing rather than passing through costs.
They though increased to +4.5% y/y.
Stripping out trade services gives the so-called “core-core” measure — final demand less foods, energy, and trade services — perhaps the most “pure” metric on underlying inflation from this report — which rose +0.27%, after +0.38% in July. Year over year it held at an elevated 4.7%, unchanged from July.
Intermediate Demand (goods and services still working through the chain toward final demand): As with headline PPI, after two months in which the pipeline deflated alongside energy, August re-accelerated across the board.
Processed goods for intermediate demand rose +1.77% after falling in July, with over 80% of the gain from processed energy goods, up +7.26% (diesel again the driver at 24.1%; jet fuel, gasoline, printed circuit assemblies, and basic organic chemicals also higher). Core processed materials less foods and energy rose +0.46%, while processed foods and feeds slipped 0.13%; fluid milk products fell 3.1%. Year over year, processed goods are up +11.5% and core is up +8.2%.
Unprocessed goods for intermediate demand rose +1.07%, led by unprocessed nonfood materials less energy (up +2.08%, with nonferrous scrap up 3.7%) and unprocessed energy materials (up +1.53%, crude petroleum higher). Unprocessed foodstuffs slipped −0.12%, and slaughter cattle fell 6.4%. Year over year, unprocessed goods are up 12.8%.
Services for intermediate demand rose +0.28%, with about 70% of the gain from transportation and warehousing services (up +1.30%) and trade services margins up +0.99%. Services less trade, transportation, and warehousing though fell -0.15%. Courier, messenger, and postal services rose 1.5%; legal services, truck freight, and airline services also rose; but management, scientific, and technical consulting services fell -4.6%. Year over year, services for intermediate demand are up 5.1% while core-core is up 2.9%.
On a production-flow basis, every stage rebounded after a flat-to-negative July:
- Stage 1 (furthest from final demand) rose +1.42% after declining in July, with goods inputs up 2.1% (diesel, nonferrous scrap, basic organic chemicals). Up +11.3% year over year, by far the most elevated stage on an annual basis.
- Stage 2 rose +0.77%, with goods inputs up +1.8% (crude petroleum, diesel, natural gas liquids, jet fuel). Up +9.7% year over year.
- Stage 3 rose +0.79%, with goods inputs up +1.0%. Up +6.5% year over year.
- Stage 4 (closest to final demand) rose +0.43%, with goods inputs up +0.7%. Up +6.7% year over year.
Fed Readthrough. Several components feed the Fed’s preferred inflation gauge, the Personal Consumption Expenditures price index, leaned hot: hospital inpatient and outpatient care and airfares all posted strong advances, and legal services as noted jumped a record 1.7%. Offsetting that to some extent was a pullback in portfolio management.
Bloomberg Economics said the PCE-relevant inputs “came in well above expectations, mainly due to hospital prices and airfares,” raising its August PCE forecast and, with it, the odds of a September hike. One note though: starting with the August PCE report on September 30, the Bureau of Economic Analysis will change how it measures prices for several categories — including legal services, computer software, and investment advice — a shift many economists expect will pull the PCE reading lower.
Goldman Sachs likewise flagged that while core producer prices came in a touch below its forecast, the PCE-relevant components were on net stronger, driven by domestic passenger airfares and medical care. It estimates the August core PCE price index rose 0.24% month over month (up from 0.22% before the PPI release), corresponding to a year-over-year rate of 3.15% — a figure that already incorporates Goldman’s forecast of the revisions from the methodological changes taking effect with the August report. Among the specific inputs, Goldman estimates domestic passenger airfares rose 4.2% and the PCE medical care services category rose 0.28% month over month; among the categories being folded into PCE under the methodology change, legal services rose 2.3% while data processing services and video-game software fell 0.2% and 2.9%, respectively. That 0.24% estimate runs a touch hotter than the 0.2% the economists at Citigroup, Morgan Stanley, and Jefferies are carrying.
BofA also raised their PCE tracking but importantly went on the other side of 0.25% to 0.26% which would round up to a 0.3%. “The PPI data that affect our core PCE tracing forecast were firmer than we assumed… Hospitals and airfares all saw price increases accelerate relative to April … This could move significantly tomorrow after CPI, but if we are correct, it should greenlight a hike at next week’s Fed meeting. Notably portfolio management and investment from PPI will no longer affect core PCE beginning in this month. This introduces another source of uncertainty in our estimate, but we do not expect the methodology change to have a large impact on the monthly rate this month.”
Following the data, markets moved to price roughly a 70% chance of a rate hike at next week’s meeting, pending Friday’s CPI. As Stephen Brown, chief North America economist at Capital Economics, put it: “With the PPI data overall still looking relatively hot, the Fed seems likely to hike this year even if it doesn’t pull the trigger this month.” ZeroHedge framed the composition shift bluntly: energy has flipped from deflation back to reinflation just as the Fed weighs its move.
The Bureau of Economic Analysis is scheduled to release August PCE data on September 30.
