Wholesale prices shrink again, PPI finds, and point to slower U.S. inflation

Wholesale costs often foretell future inflation trends. The increase in wholesale prices over the past 12 months slowed again to 1.1% from 2.3% in the prior month. That’s the lowest reading since December 2020.

A separate measure of wholesale prices that strips out volatile food and energy costs and trade margins was flat last month, the government said.

The increase in these so-called core prices over the past year decelerated to 2.8% from 3.3%, marking the smallest increase since February 2021.

The weak wholesale inflation report likely adds to the case inside the Federal Reserve to “skip” an increase in a key U.S. interest rate when senior officials on Wednesday conclude a pivotal two-day meeting.

The PPI report captures what companies pay for supplies such as fuel, packaging and so forth. These costs are often passed on to customers at the retail level and give an idea of whether inflation is rising or falling.

Key details: The decline in wholesale prices last month largely stemmed from a 14% decline in gasoline prices, a volatile category prone to large swings.

As a result, the wholesale cost of goods sank 1.4% last month and declined for third time in five months.

Still, inflation in the heart of the economy appeared to be waning.

Wholesale food costs, for example, fell sharply again and dropped for the fifth time in the past six months.

The cost of services, a major driver of inflation this year, rose a scant 0.2%.

Service sector inflation had risen sharply in 2022 and is harder to reverse, making it a particularly big worry for the Fed. But overall service prices are now up just 2.7% in the past year.

“Goods inflation is now negative, and services inflation resumed its downward trend in May,” said U.S. economist Matthew Martin of Oxford Economics.

Inflation further down the pipeline also signaled softening inflation.

The wholesale cost of partly finished goods declined for for the 10th time in 11 months. And the cost of raw materials dropped for seventh time in the past nine months.

Both categories are declining this year for the first time since the early stages of the pandemic in 2020.

Big picture: The rate of inflation is slowing and waning wholesale prices suggest more progress is likely over the summer.

Inflation is still far above the Fed’s 2% target, however, and it’s likely to take awhile to hit that goal. Prices are increasing 4% to 5% a year based on the main gauges of U.S. inflation.

Nonetheless, the Fed later today is expected to forgo an increase in interest rates for the first time in 11 meetings dating to the spring of 2022. The Fed still could raise rates again later this year if progress on inflation stalls.

Looking ahead: “The PPI confirms that inflation continues to decelerate and puts even more pressure on the Federal Reserve to pause its interest rates hikes,” said Robert Schein, chief investment officer at Blanke Schein Wealth Management in Palm Desert, Calif.

“In tandem with CPI earlier this week, the report supports our call for the Fed to pause rate hikes at today’s meeting and to keep rates on hold through year end,” Martin said.

Market reaction: The Dow Jones Industrial Average
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and S&P 500
SPX,
+1.05%
were set to open mixed in Wednesday trades. The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.730%
fell slightly to 3.81%.