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United States producer inflation jumps to 6.5% in May, highest since November 2022

Producer inflation in the United States (US) as measured by the change in the Producer Price Index (PPI), climbed to its highest level since November 2022 at 6.5% in May, from 5.7% in April, the US Bureau of Labor Statistics reported on Thursday. This reading came in above the market expectation of 6.4%.

On a monthly basis, the PPI rose by 1.1%, compared to the market expectation of 0.7%.

In this period, the core PPI increased by 4.9% on a yearly basis, matching April's print but coming in well below the market expectation of 5.4%.

The US Dollar preserves its strength

The US Dollar (USD) stays resilient against its major rivals in the early American session on Thursday. The risk-averse market atmosphere after US President Donald Trump said that they will be "hitting Iran very hard tonight" helps the USD hold its ground despite mixed producer inflation figures.

What does the US PPI data mean for the Fed?

PPI readings for May don't seem to be having a significant impact on market pricing of the Federal Reserve's policy outlook. Although the core producer inflation came in softer than expected, investors still see about a 70% probability that the Fed will raise the policy rate by at least 25 basis points by end-2026, as per CEM FedWatch Tool.

US Dollar FAQs

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.

Author

Eren Sengezer

As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.

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