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Latest US inflation report shows a pullback in travel spending and an increase in the cost of goods | CNN Business

US Wholesale Inflation Edges Higher in June, Signaling Persistent Price Pressures

Washington, DC — Wholesale inflation in the United States showed a modest uptick in June, according to the latest data from the Bureau of Labor Statistics, adding another layer of complexity to the Federal Reserve's ongoing battle against persistent price pressures. The Producer Price Index (PPI), which tracks the average change in selling prices received by domestic producers for their output, rose by 0.2% on a monthly basis, slightly above economists' expectations of a 0.1% increase. On an annual basis, the PPI climbed 2.6%, marking a acceleration from May's 2.2% year-over-year gain. This development comes amid broader economic signals that inflation, while cooling from its post-pandemic peaks, remains stubbornly above the Fed's 2% target.

The June PPI report provides a window into the inflationary dynamics at the wholesale level, which often serve as a precursor to consumer price changes. Unlike the Consumer Price Index (CPI), which measures what households pay for goods and services, the PPI focuses on costs faced by businesses before products reach store shelves. This makes it a critical indicator for understanding supply chain pressures, input costs, and potential pass-through effects to everyday consumers. In recent months, the divergence between wholesale and consumer inflation has been a point of interest for economists, as wholesale prices have sometimes moderated faster than retail ones, suggesting that businesses are absorbing some costs rather than fully passing them on.

Breaking down the June figures, the increase was driven primarily by a rebound in service prices, which advanced 0.3% from May. This category, encompassing everything from transportation and warehousing to professional services, has been a key driver of inflation in the post-Covid economy, as labor shortages and wage growth continue to exert upward pressure. Goods prices, on the other hand, were flat for the month, providing some relief after volatile swings in energy and commodities earlier in the year. Excluding the more volatile food and energy components, the core PPI rose 0.3%, aligning with forecasts and indicating that underlying inflation remains entrenched at around 3% annually.

Energy prices played a mixed role in the report. While wholesale gasoline prices fell by 2.5% in June, helping to offset some pressures, natural gas and other fuels saw modest increases due to seasonal demand and geopolitical tensions in global markets. Food prices at the wholesale level edged up 0.1%, with gains in processed foods counterbalanced by declines in fresh produce. These fluctuations highlight the uneven nature of inflation's retreat, influenced by factors ranging from weather patterns affecting agriculture to international supply chain disruptions.

Economists had anticipated a slowdown in wholesale inflation following a string of softer readings in the spring, but the June data suggests that the path to normalization may be bumpier than hoped. "This report underscores that while we're making progress, inflation isn't defeated yet," said Diane Swonk, chief economist at KPMG, in a note to clients. "The uptick in services inflation is particularly concerning, as it reflects stickier elements like wages and rents that are harder to tame." Swonk pointed out that the labor market's resilience, with unemployment hovering near historic lows, continues to fuel wage growth, which in turn feeds into higher service costs.

The broader economic context is crucial here. The US economy has demonstrated remarkable strength in the face of aggressive interest rate hikes by the Federal Reserve, which raised its benchmark rate to a range of 5.25%-5.5% over the past two years to combat inflation. Recent GDP growth has remained robust, clocking in at an annualized 2.8% in the first quarter, driven by consumer spending and business investment. However, this resilience has come at the cost of higher borrowing rates, which have squeezed households and small businesses. The June PPI data could influence the Fed's decision-making at its upcoming policy meeting, where officials are weighing the timing of potential rate cuts.

Market reactions to the report were muted but telling. US stock futures dipped slightly in pre-market trading, reflecting investor concerns that hotter-than-expected inflation might delay anticipated rate reductions. Bond yields on the 10-year Treasury note rose by a few basis points, signaling expectations of sustained higher rates. "Investors are parsing every data point for clues on the Fed's next move," noted Mark Zandi, chief economist at Moody's Analytics. "If wholesale inflation continues to surprise on the upside, it could push back the first rate cut from September to later in the year, or even into 2026."

Looking deeper into the components, the final demand PPI, which excludes trade, transportation, and warehousing margins, increased by 0.2%, consistent with the headline figure. This metric is often watched closely as it strips out intermediary costs and provides a purer view of producer price changes. Within services, healthcare and financial services saw notable gains, up 0.4% and 0.5% respectively, amid ongoing labor cost pressures in these sectors. On the goods side, while overall prices were unchanged, there were pockets of strength in chemicals and machinery, where supply constraints from global manufacturing slowdowns have persisted.

Historically, the PPI has been a reliable leading indicator for CPI trends. For instance, during the inflationary surge of 2022, wholesale prices peaked at over 11% annually before consumer inflation followed suit. The current annual PPI rate of 2.6% is a far cry from those highs, but it's still above the pre-pandemic average of around 1-2%. This lingering elevation has prompted debates among policymakers about whether the Fed's 2% target is achievable without risking a recession. Some economists argue that structural changes, such as deglobalization and the shift to renewable energy, could keep inflation higher for longer, necessitating a recalibration of expectations.

The report also sheds light on regional and sectoral variations. In manufacturing, wholesale prices for durable goods like automobiles and electronics rose modestly, reflecting ongoing chip shortages and higher metal costs. Agriculture, however, provided a counterbalance, with wholesale crop prices declining due to favorable harvests in key Midwest states. These disparities underscore the uneven recovery across the economy, where some industries are thriving while others grapple with higher input costs.

From a global perspective, the US wholesale inflation trends align with patterns seen in other major economies. In the Eurozone, producer prices have been decelerating, but services inflation remains a sticking point, much like in the US. China's deflationary pressures, driven by weak domestic demand, contrast sharply, potentially affecting global commodity prices and US import costs. As supply chains become more intertwined, events like the ongoing Red Sea shipping disruptions could further influence future PPI readings.

For consumers, the implications are indirect but significant. If wholesale pressures persist, businesses may eventually pass on higher costs, leading to renewed upward pressure on retail prices. This comes at a time when many Americans are already feeling the pinch from elevated grocery and housing costs. Recent surveys from the Conference Board indicate that consumer confidence has dipped, partly due to inflation concerns, even as wage growth has outpaced price increases for some workers.

Looking ahead, the July PPI report, due next month, will be closely watched for signs of whether June's uptick was a blip or the start of a trend. Economists at Goldman Sachs forecast a slight moderation, projecting a 0.1% monthly increase, but warn that risks are tilted to the upside due to potential energy price volatility. The Fed's own projections, updated in June, anticipate core inflation easing to 2.6% by year-end, but persistent wholesale pressures could force a revision.

In summary, the June PPI data paints a picture of an economy where inflation is cooling but not yet conquered. While the monthly increase was modest, it serves as a reminder that the fight against price pressures requires vigilance. As the Federal Reserve navigates this delicate balance between taming inflation and supporting growth, indicators like the PPI will remain pivotal in shaping policy and market expectations. For now, the data suggests that the road to 2% inflation may involve a few more twists and turns.

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