PPI: U.S. Wholesale Inflation Surges In May Fueled By Oil Prices

by Ike Obudulu Posted on June 13th, 2018

Washington, D.C., USA: The Producer Price Index (PPI), a measure that tracks change in the price of finished goods and services sold by producers, shows final demand rose 0.5 percent in May, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today.

The 0.5% surge in may compares with 0.3% median estimate in a survey of economists and is partly due to higher gasoline prices. So-called core producer prices that exclude food, energy and trade rose a much smaller 0.1% last month. Wholesale costs rose at a yearly rate of 3.1% in May, marking the highest level since early 2012.

Final demand prices advanced 0.1 percent in April and 0.3 percent in March. On an unadjusted basis, the final demand index moved up 3.1 percent for the 12 months ended in May, the largest 12-month increase since climbing 3.1 percent in January 2012.

In May, 60 percent of the rise in the index for final demand is attributable to a 1.0-percent advance in prices for final demand goods. The index for final demand services moved up 0.3 percent.

Prices for final demand less foods, energy, and trade services edged up 0.1 percent in May, the same as in April. For the 12 months ended in May, the index for final demand less foods, energy, and trade services climbed 2.6 percent.

The renewed upward trend in producer prices strengthens expectations that inflation will pick up this year and likely breach the Federal Reserve’s 2 percent target.

Producer Price Index – also called Finished Goods PPI, Wholesale Prices, PPI for Final Demand – is a leading indicator of consumer inflation – when producers charge more for goods and services the higher costs are usually passed on to the consumer.

The U.S. central bank’s preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy, increased 1.8 percent year-on-year in April after a similar gain in March.

The Fed is expected to raise interest rates for a second time this year on Wednesday.

Final demand goods

The index for final demand goods moved up 1.0 percent in May, the largest advance since a 1.1-percent rise in May 2015. In May 2018, over 80 percent of the broad-based increase in prices for final demand goods can be traced to the index for final demand energy, which jumped 4.6 percent. Prices for final demand goods less foods and energy and for final demand foods rose 0.3 percent and 0.1 percent, respectively.

Final demand services

Prices for final demand services moved up 0.3 percent in May, the fifth consecutive rise. In May, 80 percent of the advance in the index for final demand services can be traced to margins for final demand trade services, which climbed 0.9 percent. (Trade indexes
measure changes in margins received by wholesalers and retailers.) Prices for final demand transportation and warehousing services increased 0.7 percent. The index for final demand services less trade, transportation, and warehousing was unchanged.

How the Producer Price Index (PPI) differs from the Consumer Price Index (CPI)?

While both the PPI and CPI measure price change over time for a fixed set of goods and services, they differ in two critical areas: (1) the composition of the set of goods and services, and (2) the types of prices collected for the included goods and services.

The target set of goods and services included in the PPIs is the entire marketed output of U.S. producers. The set includes both goods and services purchased by other producers as inputs to their operations or as capital investment, as well as goods and services purchased by consumers either directly from the service producer or indirectly from a retailer. Because the PPI target is the output of U.S. producers, imports are excluded. The target set of items included in the CPI is the set of goods and services purchased for consumption purposes by urban U.S. households. This set includes imports.

The price collected for an item included in the PPIs is the revenue received by its producer. Sales and excise taxes are not included in the price because they do not represent revenue to the producer. The price collected for an item included in the CPI is the out-of-pocket expenditure by a consumer for the item. Sales and excise taxes are included in the price because they are necessary expenditures by the consumer for the item.

The differences between the PPI and CPI are consistent with the different uses of the two measures. A primary use of the PPI is to deflate revenue streams in order to measure real growth in output. A primary use of the CPI is to adjust income and expenditure streams for changes in the cost of living.

The composition of items in the Finished Goods Price Index differs from that of the All Items Consumer Price Index in two major respects. First, the Finished Goods Price Index includes price changes for producers’ durable equipment, which are not purchased by typical consumers and, therefore, are not included in the CPI. Second, the All Items CPI includes services which are not reflected in the Finished Goods Price Index. An additional difference is that the Finished Goods Price Index is only available at the U.S. level, while the All Items CPI is available at the regional, metropolitan area, and U.S. levels.

Author

Ike Obudulu

Ike Obudulu

Versatile Certified Fraud Examiner, Chartered Accountant, Certified Internal Auditor with an MBA in Finance And Investments who has both worked for and consulted with some of the world's largest companies on main street and wall street in over 20 countries, Ike brings his extensive reporting and investigations experience to bear on his role as Chief Editor.
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