Broad-Based Weakness in May
Reflecting both lower energy and food costs, total finished goods prices dropped by the most since July 2009, declining 1.0 percent in May. Concerns of slowing global growth have weighed on energy prices in particular, as the wholesale energy index fell for the third-straight month, down 4.3 percent. Accounting for more than 80 percent of the energy component’s decline, wholesale gasoline prices dropped 8.9 percent. Given the pullback in oil prices over the past couple of months, this moderating trend suggests that we will see a significant decline in retail gasoline prices when the May CPI report is released on Thursday. Excluding energy, finished goods prices remained flat on the month. Finished Goods Producer Price Index Year-over-Year Percent Change 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% -2% -2% -4% -4% Broad-based weakness was also seen in consumer food prices. Falling by -6% the most this year, consumer food prices fell 0.6 percent in May after recording modest 0.2 percent gains in April and March. More than 60 percent of the consumer food price decline was tied to lower meat prices, down 2.2 percent, as pork, beef and veal fell on the month. In addition, prices for eggs, fish, turkey and dairy products also moved lower. Over the past year, food prices are up 3.3 percent. Excluding food and energy, finished goods prices increased a trend-like 0.2 percent in May. More than a quarter of core PPI’s increase was tied to a 0.7 percent gain in pharmaceuticals. Elsewhere, passenger car prices remained rather quiet, rising just 0.2 percent. Year over year, core PPI inflation remained flat, at a 2.7 percent pace. With the three-month annualized rate of growth in core PPI increasing just below the year-over- year pace, at 2.5 percent, we expect to see core wholesale inflation begin to slowly ease.
Pipeline Pressures Ease
Inflation pressures further back in the production pipeline also eased. Falling for the second-straight month, intermediate goods prices fell 0.8 percent. In the crude stage, prices contracted for the third-straight month, down 3.2 percent. In both cases, lower energy prices accounted for the lion’s share of the decline, as global growth concerns have weighed heavily on a wide variety of commodity prices. As we look ahead, our baseline case remains for input costs to moderate, with headline wholesale inflation easing over the coming quarters. Slowing global growth and restrained domestic demand should continue to put downward pressure on commodity prices. While headline wholesale inflation jumped 6.0 percent in 2011, we expect that pace to cut by two- thirds in 2012 to 1.9 percent. Core PPI inflation may take a little longer to show significant moderation, but should eventually slow on a year-over- year basis over the next year.