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PNC Senior Economist Kurt Rankin: PPI Inflation Down 0.5% for July 2022,

Michigan Business Network
August 12, 2022 1:00 PM

pncfsg CroppedFollowing Energy Costs Lower
  • The Final Demand Producer Price Index (PPI) fell by 0.5% in July 2022 versus June
  • PPI for Goods production fell sharply, down 1.8% for July 2022 over the month prior
  • Energy PPI gave back all of the spike in prices seen in June and more, down 9.0% for July 2022
  • Core PPI, excluding Food & Energy moderated to a 0.2% gain in July 2022, its slowest gain since September 2021

The Producer Price Index (PPI) for July 2022 fell versus the month prior, down 0.5% versus June. This translates to a 9.8% non-seasonally adjusted year-over-year gain, which is down from the 11.3% mark posted in June. Retreating Energy prices drove the July 2022 results and all points of the U.S. economy’s supply chain appear to be following suit. PPI for Components & Materials for Manufacturing saw a second consecutive monthly decline, down 0.6% in July 2022 following a 0.1% decline in June. And Final Demand for Transportation & Warehousing Services saw growth slow to a 0.4% - down from a peak monthly inflation rate of 5.6% in March 2022. Slowing price growth, including some outright declines in commodity-driven pricing facing goods & services producers, is a very positive sign as the fight to tame inflation wears on. Lower prices for producers will ease upstream pressure on consumer price inflation throughout the remainder of the year.

The Federal Reserve’s monetary policy tightening plans remain aggressive, and rightly so given that inflation has not yet run its full course. But producers will follow consumer behavior first and foremost. Some progress toward the “Demand Destruction” among households that the Fed has aimed at through higher borrowing costs was revealed in Wednesday’s (8/10) consumer price inflation report, which revealed that price gains slowed more than expected in July. PNC is forecasting Fed Fund rate hikes of 50 basis points out of September’s policy meeting, and further 25 basis point hikes in November and December. The coming months’ PPI inflation reports will be an early warning signal as to the success of the Fed’s offensive. If consumer respond to higher borrowing costs – and higher prices in general – producers will face less demand side pressure on their own prices and the resulting trickle-down effect will allow inflation throughout the U.S. economy to ease more organically in the second half of the year.

Producers’ energy costs fell by 9.0% in July 2022. This result gives back all of the June 2022 gains on the temporary spike in fuel costs that month and puts the PPI Energy component index back below its May 2022 level (164.94 versus 165.59). The Energy PPI inflation measure is still up 36.7% versus one year ago (seasonally adjusted), but what matters for the direction of the U.S. economy now is how energy prices trend in the months ahead. Declining energy costs will remove a significant hurdle toward resolving supply chain disruptions, namely the need to balance rising and volatile costs with the need to ramp up production toward balance with demand. As consumer demand shifted from goods to services, that balancing act began to gain traction throughout the summer months and even led to some excess inventory conditions for retailers where store shelves had previously been bare all too often. The summer travel and recreation season will also be slowing in the next few months, removing another demand-side pressure from producers’ pricing calculus. Consumers are unlikely to see the prices that they face come down as producers regain their own equilibrium on the cost front, but at least producers will no longer be passing on sharp price increases of their own to retailers and eventually households.

Even excluding the volatile food & energy components of PPI, price growth showed significant easing in July. The Core PPI measure, which excludes price movements for food & energy producer costs, slowed to 0.2% for the month after nine (9) consecutive monthly gains at 0.4% or above. The costs for both manufacturers, as well as transportation & warehousing operations, grew at -0.6% and +0.4% respectively, and both decelerating from June and from exceptionally strong gains throughout the first half of 2022. The costs trends faced by these fundamental links in the U.S. economy’s supply chain not only indicate where overall inflation is headed, but also how business activity overall may perform. A stable operational environment regarding costs suggests that manufacturers and transportation & warehousing businesses are less likely to pull back on capacity as a means of maintaining profitability. Slowing consumer demand could ultimately force such a retrenchment, but at least producers do not appear to be facing forced cutbacks in the months ahead as a result of cost volatility, as was a distinct possibility during the worst of the recent (and still not completed) bout with inflationary pressures.

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.

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