Merk Investments: Producer Price Index (May)
The producer price index for the month of May increased 1.4% month over month and 7.2% year over year. Excluding food and energy, prices advanced 0.2% and 3.0% over that same period. The cost of consumer goods jumped 1.8% m/m and 8.8% y/y. As expected, the primary catalyst behind the sharp increase in producer costs was the 3.8% increase in residential gas and 9.3% rise in the price of gasoline.
If the increase in the headline costs were not enough, prices in the pipeline are not red hot. Total intermediated increased 2.9% m/m and 12.6% y/y. On a three month annualized basis, intermediates are up 27.7%. Much will be made about the core ex-food and energy arriving on target, vis-à-vis market expectations. However, intermediates paint a very different picture. Ex-food and energy prices increased 2.0% and 7.4%. Ex food, costs rose 2.9% and 12.2% respectively. Ex-energy cost advanced 2.1% and 8.1% over that same time frame. On a 3 month annualized basis, ex-food and energy increased 18.5%, ex food was up 27.7% and ex-energy climbed 19.0%.
Over the past several months, many thoughtful market observers have found comfort in core rates of pricing that have advanced above the implied target range of the Federal Reserve. Based on the data that we have seen in May, that can be little more than cold comfort. The red-hot increase inside total and core intermediates foreshadows significant trouble for firms down the line. We do not see how the sharp rise in core intermediates, in compliment to the headline prices, will not erode already thin profit margins and set the stage for higher prices downstream for consumers.
Joseph Brusuelas
Merk Investments
Chief Economist/VP Global Strategy
|
