After two months of solid advances, wholesale prices in the U.S. unexpectedly reversed course in May, indicating that inflationary pressures remain slight, according to the latest report on inflation from Washington.
The Labor Department said that its new Producer Price Index for Final Demand dipped 0.2 percent in May, following a 0.6-percent surge in April and 0.5 percent advance in March. Economists were predicting a gain of 0.2 percent for the May figure. Compared to May 2013, wholesale prices were up by 2 percent, the report showed. In April, year-over-year inflation rose 2.1 percent.
The Federal Reserve, which has been trying to goose inflation higher, targets at least 2.0 percent annual inflation. Hitting the 2.0 percent mark in April was the first time that happened since last July. The PPI is one of three measures of inflation from the nation's number-crunchers, with the Consumer Price Index representing the broadest measure.
Cheaper prices may be what most consumers want, but it can cut into margins throughout the manufacturing chain, making it harder for businesses to increase profits and pay debts.
Analysts have been having a hard time forecasting the PPI since the government revamped the index at the start of the year to include a wider swath of data. The old index only covered about one-third of the economy, but adding in services and construction in January made the index, now dubbed PPI-FD (which will likely eventually just revert back to “PPI” after the newness wears off), cover about three-quarters of the economy. The services sector can typically be volatile, making it tough to get a read on the index and the inflation levels that it is supposed to help delineate.
To that point, Wall Street didn’t give too much of a response to the report on Friday as most still don’t really know what the figure is saying. Further, a pullback in inflation after the rise in March and April isn’t that big of a deal as the broad picture shows inflation remaining contained.
Digging past the headline figure, so-called “core” PPI, which excludes the volatile food and energy segments, declined by 0.1 percent in May after rising 0.5 percent from March to April. Economists thought core PPI would climb 0.1 percent last month.
All categories posted lower costs during May, save transportation and warehousing.
Cost of services dropped 0.2 percent, led by a 0.5-percent contraction in trade services. It was the first decline in cost of services, which measure changes in margins received by wholesalers and retailers, since February.
The cost of goods slipped by 0.2 percent, the biggest drop since a 0.7-percent plunge in April 2013. A decrease of 0.9 percent in gasoline prices accounted for about half of the decline in May. Energy prices on the whole were down by 0.2 percent last month.
Wall Street still views the risk related to inflation to the upside, so the negative signs in the report for headline and core PPI did not make traders waver. The Dow pushed ahead by 41 points in Friday action, while the S&P 500 added 6 points and the Nasdaq edged up 13 points.