Key facts
- U.S. producer prices rose 1.1% in May, exceeding economists' expectations.
- The annual PPI increase of 6.5% through May was the largest since November 2022.
- Energy products drove nearly 80% of the PPI increase, with services prices up 0.3%.
- The U.S.-Israeli conflict and shipping restrictions in the Strait of Hormuz contributed to higher energy costs.
- Consumer inflation also rose, with the CPI jumping above 4% in May.
U.S. producer prices increased more than expected in May, with the Producer Price Index (PPI) for final demand advancing 1.1% from the previous month. This followed a downwardly revised 1.1% surge in April. Economists had forecast a 0.7% rise for May. The annual PPI increase reached 6.5% through May, the largest gain since November 2022. This surge was largely driven by a 2.8% increase in the price of goods, primarily energy products, which accounted for nearly 80% of the overall PPI rise. Prices for services saw a more modest gain of 0.3%.
The conflict between the U.S. and Iran has been cited as a factor driving up energy product costs, including gasoline and diesel. Additionally, supply chain disruptions stemming from restricted shipping in the Strait of Hormuz are contributing to shortages of various goods. This rise in wholesale inflation comes shortly after the government reported that consumer inflation, measured by the CPI, jumped above 4% in May for the first time in three years.
Financial markets are pricing in a potential rate increase from the Federal Reserve, influenced by rising inflation and a stable labor market. However, some economists believe the bar is high for policy tightening, viewing the oil price shock as currently confined to the transportation sector. The Federal Reserve is widely expected to maintain its benchmark overnight interest rates between 3.50% and 3.75% at its upcoming meeting, though economists anticipate a shift away from its easing bias. Projections suggest PCE inflation could rise by 0.4% in May, potentially reaching a 4.0% annual increase, the highest since May 2023.