The producer price index has shown a robust increase in August. This is the highest annual increase in about 11 years. This shows that high inflation will stay for a while when the coronavirus pandemic runs unabated and continues to pressurize supply chains. The strong supply and demand restraints were underscored by other data that showed that the pace of inventory accumulation at wholesalers slowed the month before August. It is now taking wholesalers the fewest time in more than six years to clear their shelves. According to Will Compernolle, an expert at FHN Financial, "supply chain bottlenecks have persisted longer and more intensely than most predicted at the beginning of this year, and widespread labor shortages are among the main input issues producers are dealing with. This means consumer price inflation should remain elevated for a while."
The latest wave of coronavirus infections is the Delta variant. It has severely disrupted the production at factories in Southeast Asia. These factories are key sources of raw materials for the manufacturers in the country. There has been increased pressure on the supply chains due to congestions at the Chinese ports. In a year's duration through August, the producer price index increased by 8.3%. This is the highest year-on-year increase since November 2010. That was when the series was revamped. The producer price index had risen by 7.8% in July.
The producer price index for final demand increased by 0.7% the previous month after consecutive monthly increases of 1.0%. The Labor Department released the data. A 0.7% growth led to the increase in services following a jump of 1.1% in July. There was a 1.5% increase in trade services. These measure the changes in margins that retailers and wholesalers receive. This accounted for an increase of two-third in the wide increase in services. The goods prices increased 1.0% after a growth of 0.6% in July. The food sector also made a comeback with a growth of 2.9%. The warehousing and transportation increased by 2.8%.
In the producer price index, the final demand prices increased 0.3% for July. This excluded trade, energy, and food services. The level was the Dow Jones estimate of 0.5%. This means that the producer price index has increased by 6.3%, present a year before. This was the biggest record increase for data going back by nearly nine years. The final demand for services increased by 0.7% for August. This was due to an increase of 1.5% in trade services or the margins obtained by retailers and wholesalers. The warehousing and transportation costs increased by 2.8%. Nearly one-third of the overall increase came from optical goods, beauty, and health. These increased by 7.8%. The costs related to outpatient hospital care decreased this time around. They declined by 1.5%.
The costs for final demand goods increased by 1% for August. This was majorly due to an increase of 2.9% in foods. The food segment was boosted by an increase of 8.5% in meat costs. The slaughtered poultry costs increased by 11%. The costs decreased for diesel fuel, steel, and iron. Experts had predicted that the producer price index would increase by 0.6% on a monthly basis and increase by 8.2% year on year. The stocks on Wall Street were a little lower. The dollar was sideways against a basket of currencies. The US treasury prices declined.
The Institute for Supply Management conducted surveys this month. It showed that the prices paid by services and manufacturing industries fell by a large margin in August. But still, they were elevated. Service providers and factories are struggling to secure raw materials and labor. They are also facing logistical delays. This was seconded by the Federal Reserve's Beige Book report. The report was created from information collected on or before the end of August. It said that "contacts reported generally higher input prices but, as with labor, they were mostly concerned about getting the supplies they needed versus the price."
The supply bottlenecks make it more challenging for organizations to restock after inventories get over in the first half of the year. The Commerce Department also released a different report. It said that wholesale inventories increased by 0.6% in July after increasing by 1.2% in June. The sales grew by 2.0%. At the sales speed of July, it will take wholesalers 1.20 months to clear their inventory. These will be the fewest days required since July 2014. The mark was at 1.22 in June. "Producers are struggling to replenish their stockpiles against surging demand," said Matt Colyar, an economist at Moody's Analytics in West Chester, Pennsylvania.
The inventories are tight. Producers are passing the increased prices on to the buyers. Federal Reserve Chairman Jerome Powell has continuously said that high inflation is temporary. Many experts also say the same thing. But a few say that robust wage increases from a narrower labor market show that inflation can be more persistent than touted. According to Charlie Ripley, investment strategist at Allianz Investment Management, "today's data on wholesale prices should be eye-opening for the Fed, as inflation pressures still do not appear to be easing and will likely continue to be felt by the consumer in the coming months."
The preferred inflation measure of the Federal Reserve for its 2% target is the core personal consumption expenditures price index. It grew by 3.6% in the past year through July after seeing similar growth in June. The data next week is also expected to show that the consumer price index has increased by 0.4% in August and is increasing by 5.3% on a year-on-year basis. The supply constraints and high inflation have majorly decreased motor vehicle sales in August. This has prompted experts to decrease their growth estimates of the third-quarter gross domestic product to as low as 3.5% annualized from as high as 8.25%. The economy increased by a 6.6% rate in the second quarter.
According to Chris Rupkley, an expert at Fwdbonds, "the danger with inflation is once prices go up, they do not go back down, and the economy and producers and consumers all have to live in a costlier world where many do not have the means to do more than just barely survive." But there are signs that inflation is now near its peak. The producer price index showed that the prices have increased by 0.3%, excluding the volatile trade services, energy, and food segments. This is the smallest growth since last November. The core producer price index has increased by 0.9% in July. In the one year through August, the core producer price index grew by 6.3%. This was the biggest growth since the federal government started the series in August 2014. This was followed by an increase of 6.1% in July.
The details of the producer price index components are also present in the core PCE price index. They gave mixed results. The healthcare costs decreased by 0.2%. The portfolio management fees increased by 1.1%. Airline tickets grew by 8.9% after seeing a growth of 9.1% in July. According to Andrew Hollenhorst, an expert at Citigroup in New York, "Soft medical services suggest that evidence of persistently stronger inflation in PCE may be more limited.”
US Wholesale Inventories Rise
The US wholesale inventory accumulation decreased in July. It was far behind sales. Wholesalers find it very easy to clear inventories, taking the shortest times in the past seven years. The Commerce Department said that the wholesale inventories have increased by 0.6% as forecasted the previous month. The stocks at wholesalers saw a growth of 1.2% in June. The wholesale inventories increased by 11.5% in July from the year before. The inventories are a major part of the gross domestic product. The segment of wholesale inventories that issued for the calculation of GDP grew by 0.7% in July.
The business inventories were over in the first half of 2021. But there have been difficulties in refilling stocks due to the port congestion in China and the coronavirus pandemic. The inventory rebuilding is looking to underline economic growth in the latter half of the year.