The Federal Reserve is anxious to see some level of inflationary pressure, but unfortunately for Chairman Yellen, this does not appear to be on the horizon. Producer prices as measured by the PPI remains contained at 2.6% year-over-year (YOY), short of placing any upward pressure on the Consumer Price Index (CPI). Generally, increases in the Consumer Price Index (CPI) occur shortly after inflationary signs appear in the PPI.
After a brief period of inflation supporting rate increases by the Federal Reserve the consumer price index has moved back under a 2.0% target to 1.7%. At this rate, inflation is not supporting an additional rate increase in the bank rate. The producer price index also dropped to 1.9% annual rate. In general, increases in the PPI are reflected in the CPI several months afterwards. Neither inflation index is indicating an increase in overall prices in the near term. Both are at levels that are well within our current forecast.
After a sizable increase in producer prices last month, prices moderated with a slight drop reaching 2.4% annualized. This is a welcome slowdown as recent increases were starting to indicate a potential long term increase that could lead to inflation at the consumer level. With a spread of 0.5% between the CPI and PPI and with several months of trending increases, the Fed may decide to raise bank rates today in an effort to return to “normal” interest rates. Normal bank interest rates at the Fed are considered to be 3.0%.
After last month’s increase of 2.2% the consumer price index moderated this month and moved down to 1.9% when measured over the past 12 months. This is slightly higher than the 10-year average of 1.6% and lower than the Fed target of 2.0%. The move was created by a 0.1% drop in May that came about primarily due to reductions in energy overall, and specifically gasoline. Food was slightly up by 0.2%. Energy related products remain the major influence in fluctuations in the index while most other prices remain stable.
There was a sizable increase in producer prices recently. The general trend displayed in the chart below by the red line has been indicating a gradual increase in prices. The annual rate is now at 2.5%. If the increases find their way into consumer prices, the Fed has good reason to continue with their methodical increases in bank rates.