Wholesale inflation heated up in May but was still cooler than anticipated. The producer price index for final demand was up 0.1% month-over-month after falling 0.2% in April. This was lower than the expected 0.2% growth. On an annual basis, headline PPI increased 2.6%, up from 2.5% in April and consistent with the forecast.
Core PPI (excludes food and energy) rose 0.1%, up from -0.2% in April but lower than the expected 0.3% growth. On an annual basis, core PPI eased to 3.0% from 3.2% in April and was lower than the 3.1% forecast.
Producer Price Index: Finished Goods
The BLS shifted its focus to the "final demand" PPI series in 2014, but data for these series extend only back to November 2009 for headline PPI and April 2010 for core PPI. Since our analysis emphasizes longer-term trends, we continue to track the legacy PPI for finished goods, which the BLS still includes in its monthly updates. As a later overlay chart will illustrate, the final demand and finished goods indexes remain highly correlated.
In May, the PPI for finished goods rose 0.4% month-over-month, up from -0.1% in April. Year-over-year, headline PPI for finished goods accelerated to 1.5% from 0.6% in April. Meanwhile, core PPI for finished goods was up 0.3% on the month, unchanged from Aril. On an annual basis, core PPI for finished goods increased from 2.5% in April to 2.6% in May.
Producer Price Index (PPI) vs. Consumer Price Index (CPI)
Both PPI and CPI illustrate monthly price changes. However, as their names suggest, the Producer Price Index measures price changes from the producer perspective whereas the Consumer Price Index measures price changes from the consumer perspective. PPI is thought to be a leading indicator of consumer inflation because, for the most part, when producers pay more for goods and services they are likely to pass along those higher costs to the consumer. With that being said, during the 2020 recession producers were unable to pass along price increases, demonstrating the higher volatility of core PPI than core CPI. This relationship is further illustrated in the next chart.
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