Surging Energy Costs Push Producer Prices Higher

The largest monthly climb in energy costs since November 2007 caused the Producer Price Index to climb 1.7% in August, a much faster rate than the +0.8% expected by markets.

To put that in perspective, the Federal Reserve’s preferred rate of inflation is 2.0% per year, a number almost reached in a single month. But fluctuations in the price of oil have caused the headline index to go on a roller coaster ride recently: prices fell 0.9% in July after increasing 1.8% in June.

This month, soaring energy prices were responsible for “over 90%” of the month’s increase, as gasoline prices surged 23% in the month.

Because of the headline’s volatility, investors and Fed officials instead focus on core prices, which strips out food and energy components. In August, core prices ticked higher than predictions with a 0.2% gain in the month, more than the +0.1% median forecast.

Eric Lascelles, chief economics and rates strategist at TD Securities, called the rise in oil prices “massive,” but noted that all other categories increased at a more contained pace between +0.1% and +1.0%. 

“Even with strong headline PPI this month, the annual figure is still at just -4.3%, though this is much improved from the -6.8% in the prior month, and it remains pinned down by base effects that are quickly eroding,” Lascelles added. “It is just a matter of time before this figure pops back into the black.”

The -6.8% rate last month was a record, whereas core prices have been more stable.

Core producer prices are currently up 2.3% from last year, three-tenths above the Fed’s preferred rate.

The more important Consumer Price Index will be released tomorrow morning.

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