Producer Prices Rise Rapidly, Another Indicator of Major Inflation

By Natalie DeCoste

The Labor Department reported a rapid increase in the rate at which producer prices are rising in its news release for May 2021.

The Labor Department reported Tuesday that producer prices rose at their fastest annual rate in nearly 11 years in May. According to the report, there was a 6.6% annual increase in producer prices, which is the largest 12-month increase since the Bureau of Labor Statistics began tracking the data in November 2010.

The Producer Price Index (PPI) for final demand increased at a seasonally adjusted rate of 0.8% in May. During the previous months, the index rose 0.6% in April and 1.0% in March.

“Nearly 60 percent of the May increase in the index for final demand can be traced to a 1.5-percent rise in prices for final demand goods. The index for final demand services moved up 0.6 percent. Prices for final demand less foods, energy, and trade services increased 0.7 percent in May, the same as in April,” reported the Labor Department.

The annual index data has been impacted by a “base effect,” similar to the Consumer Price Index(CPI). The CPI rose 5% in May from a year earlier, the largest annual inflation increase since the 2008 financial crisis. The year-ago numbers for the Producer Price Index for final demand were depressed by pandemic-driven shutdowns, making the current figures look large by comparison. Economists expect the impact of the base effect to dwindle in the fall.

Even taking into account the base effect, the increase looks daunting. The average rise for the index between 2017 and 2019 was a mere 0.2%. Most of the annual increase can be traced to a rise in goods prices, which jumped up 1.5% in May from April. Prices that increased the most in May included beef and veal, up 10.5%, and mobile homes, which climbed 3.5%.

The rapid rate of increase is another indicator of widely anticipated inflation set to hit the U.S. economy. The Biden administration has confidence that inflation will fall back to moderate levels once the global economy returns to normal following the coronavirus pandemic. However, concern remains in the economics community.

The Producer Price Index usually is not as big of a concern for economists and often does not move in sync with CPI, but all of that started to change in January of this year.

“PPI matters much more than it usually does because inflation matters much more than it has for years. We haven’t had an inflationary shock like this in a decade. We know we’re in the middle of an inflationary shock but what we still don’t know is how bad it is. That’s a big part of what we’re looking to these inflation data for,” said Bill Adams, senior economist at PNC Financial Services Group.