Up 0.8% for the Month

• Final Demand Producer Price Index (PPI) rose 0.8% in May 2022 versus the month prior, a 10.7% year-over-year increase (seasonally adjusted)
• Core Final Demand Producer Prices, less Food & Energy, continued strong gains into May 2022, rising by 0.5% versus April
• Energy PPI bounced in May 2022, up by 5.0% for the month following oil prices higher
• Transportation & Warehousing Services prices maintained strong increases in May 2022, signaling continued price pressures from all aspects of supply chains.

The Producer Price Index (PPI) for May 2022 bounced by 0.8% after a minor lull in April (+0.4 percent). This translates to a still-elevated 10.7% year-over-year gain in producer prices. The unrelenting rise in producers’ costs signals that consumers will find little respite from inflation in the coming months as those costs are passed on from raw materials, through production, transportation, warehousing, and ultimately retail markups. The Federal Reserve’s efforts to cool the demand side of the economy through monetary policy tightening may be leaning toward a more aggressive strategy, but ongoing supply chain bottlenecks and lack of labor resources will keep supply-side price pressure high, as demonstrated by the May 2022 PPI results.

Producers’ energy costs rose 5.0% for the month of May 2022 alone. The Energy PPI inflation measure is now up 44.6% versus one year ago (seasonally adjusted), its second-strongest year-over-year result of the pandemic era. Businesses’ energy costs represent the ultimate compounding factor in terms of consumer price pressures. The cost of raw materials and the energy to run manufacturing equipment pairs with the higher cost of transportation before goods for sale even reach store shelves. Those costs are all passed on to consumers, and on a delay as today’s higher producer costs become tomorrow’s wholesale prices. May 2022’s strong Energy PPI result is a sure sign that consumers will continue to see rising prices across all consumption categories throughout the coming months.

Producer price growth for service providers resumed its upward trend in May 2022 after a downward revision in April showed a slight decline. Service-oriented businesses saw their costs rise 0.3% for the month, and further cost increases are likely on tap for the sector as summer demand for services has shown no sign of slowing. Leisure & Hospitality industry employment still sits well below pre-pandemic levels across the nation, implying that upward labor cost pressures will remain unrelenting in the coming months.

The May 2022 result for Food-related PPI offers a bit of good news. Food PPI was essentially flat for the month – down 0.04% versus April. This result may result in somewhat less food price stress for consumers over the next few months. And with prices rising dramatically across every consumer category to date, every little bit of relief will help household balance sheets.

The Federal Reserve’s monetary policy tightening plans for the coming year will help to slow future demand but are generally expected to have lagged impacts of between 12 and 18 months. Producers’ response to these moves is hoped to be a diminished appetite for expansion (including in terms of hiring), but businesses will follow consumer behavior first and foremost.

If the Fed cannot incite demand destruction among households through higher borrowing costs, inflationary pressures will end up being far more stubborn and for longer than anticipated. PNC is forecasting Fed Fund rate hikes of 50 basis points in both June and July, and three (3) further quarter-point increases in the second half of 2022. One of their earliest indicators of success will be the PPI inflation reports of the next few months. If businesses see signs of slowing consumption, easing of their own demand will reveal itself through slower PPI gains.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.