There was further damage to inflation on Thursday. After the Consumer Price Index came in unexpectedly weak on Wednesday (it rose 3.3% year-on-year in May), the Producer Price Index rose 2.2% for the same period. This was also below expectations. The Producer Price Index fell 0.2% month-on-month.
In between these two data releases, the central bank's Federal Open Market Committee finished its June meeting, released new interest rate forecasts, and held a press conference that was fairly cautious, despite the CPI report showing inflation improving.
Federal Reserve governors have agreed to cut interest rates once this year, compared with three cuts expected when they last issued their forecasts in March.
Where exactly is this heading? First, some basic knowledge about the Producer Price Index.
The report, officially titled the Producer Price Index (PPI) of Final Demand, measures the prices producers receive for the goods and services they sell, such as appliances, insurance and health care.
Paul Ashworth, chief North American economist at Capital Economics, said the PPI is reflected in the Personal Consumption Expenditures Price Index, the Fed's preferred inflation measure.
“Yesterday we saw that the Consumer Price Index (CPI) was pretty weak. Today we see that the Producer Price Index (PPI) is also pretty weak. When you put those together you see that the PCE index is also pretty weak,” he said.
Still, Scott Wren, senior global marketing strategist at Wells Fargo Investment Institute, said the Fed has become more hawkish in its stance on inflation and interest rate cuts.
“Inflation is slowly coming down. It's still too high for the Fed. The Fed needs more persuasion,” he said.
This has further strengthened confidence that inflation is indeed heading toward the Fed's long-run goal of 2%.
Meanwhile, the economy remains heavily hurt by inflation.
“Certainly our clients are being hit very hard by inflation and are seeing a significant increase in claims,” said Dan North, senior economist at credit insurer Allianz Trade, which pays out insurance to suppliers if clients delay or miss invoices – for example, if goods shipped to stores don't sell.
“Consumer buying habits are changing, moving from steak to chicken, from top shelves to bottom shelves,” he said.
And those consumers are sorely disappointed.
Wells Fargo's Wren noted that prices have outpaced wages for the past four years, and even though inflation has been falling, prices are still rising.
“Prices are only rising at a moderate pace, but consumers want deflation; they want the same prices as in 2019,” he said.
And he said that can't happen.
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