Between Wednesday and Thursday, two important pieces of economic news came out. The Consumer Price Index and Producer Price Index numbers are more nuanced than they might seem. However, they do suggest harder times coming ahead for those not comfortably protected by sufficient wealth.
The May CPI report showed a 0.5% month-over-month increase, the same as in April. The so-called core index for all items other than food and energy, because those are subject to high volatility and make it difficult to see the ongoing effect of inflation, was up 0.2%.
CPI was up 4.2% for the 12-months ending in May. The same measure for April was 3.8%. Looking at core inflation, it was up 2.9% in May, compared to 2.8% in April. The biggest difference between CPI and core CPI was the 23.5 year-over-year energy index in May. Food was up 3.1%.
There is some good, or at least neutral, news buried, according to Jason Pride, chief of investment strategy and research at wealth management firm Glenmede. “Core goods prices fell 0.1% in May, with new vehicles down 0.3% and medical care commodities down 0.7%,” he said. “This represents the clearest data point in today’s report that the Iran shock, however large at the pump, has not metastasized into a generalized inflation episode.”
The energy issues, though, also include other oil byproducts like fertilizers, and as of late April, 70% of farmers couldn’t afford the fertilizer they needed for full planting this season. This is likely to reduce food production and drive up prices, but it won’t become obvious until the lack of food hits in the late summer or early fall.
CPI was only one of the two major indicators. The other, PPI, is the business and industrial version of CPI. The reading was “the highest since 2022 and well above consensus expectations,” according to Dr. Rebecca Homkes, a lecturer at the London Business School.
“And core, where we wipe out the volatile energy and food prices, accelerated only 0.4% to an annual rate of 5.1%, was also the highest since 2022,” she said. “The bigger number in today’s read was 80%: 80% of the increase came from a 2.8% increase in final demand good prices, which is the largest jump since this data started in 2009. And 80% of that rise came from an over 10% increase in energy.”
PPI is considered a predictor of consumer prices, according to Wei-Yin Hu, vice president of financial research and strategy at Edelman Financial Engines. “Going forward, the Iran conflict could continue to loom over the inflation data. With oil inventories declining and production facilities needing repair, there’s still a possibility we haven’t seen the worst of inflation for the year.”
“But in this environment, a sharp acceleration in the PPI also suggests employers are building healthy margins to maintain headcount and support a ‘low-fire’ labor market,” said Noah Yosif, chief economist at the American Staffing Association and one-time economist at the Bureau of Labor Statistics.
While trying to predict what might happen, as Robert Johnson, professor of finance at Creighton University’s Heider College of Business pointed out, much of what we’re seeing didn’t have to happen.
“This entire episode of inflation is self-inflicted by the Trump administration,” he said. “It began with the tariff policies. And not simply the tariff policies, but the arbitrary on and off nature of them. It didn’t allow companies to plan with any certainty. Then, on top of the tariff policies, which are very inflationary, the unprovoked Iranian war increased energy prices. The sad part is that both of these events are self-inflicted wounds. And, as a result, consumers are paying the price of increased inflation.”
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