US PPI Rises in May Supporting Fed Plans for Rate Hike

U.S. producer prices in May recorded their biggest increase in more than 2-1/2 years as the cost of gasoline and food rose, suggesting that an oil-driven downward drift in prices was nearing an end.

The stabilization in producer prices should support views that the Federal Reserve will raise interest rates this year. While the labor market has tightened, there have been few clear signs that inflation was poised to rise back toward the Fed’s 2 percent target.

“This report essentially confirms that the disinflationary impulse in headline prices, which has been brought about by the collapse in energy prices, is beginning to abate as crude prices shift higher,” said Millan Mulraine, deputy chief economist at TD Securities in New York.

The Labor Department said on Friday its producer price index for final demand increased 0.5 percent last month, the largest gain since September 2012. That followed a 0.4 percent decline in April.

In the year to May, the PPI fell 1.1 percent, marking the fourth straight 12-month decrease. Prices dropped 1.3 percent in the 12 months through April, the biggest fall since 2010.

Prices of U.S. government debt were largely unchanged after the data, while the dollar pared gains against a basket of currencies. U.S. stock index futures were trading lower.

A sharp decline in crude oil prices since last year and a strong dollar have weighed on producer prices. While rising oil prices are easing some of the downward pressure on inflation, the upward trend in producer prices is likely to be gradual because of the dollar’s strength.

via Reuters

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza