Monday Economic Report: Over the Past 12 Months, Producer Prices for Final Demand Goods and Services

AICC, through its membership in the Council of Manufacturing Associations, is pleased to present the "Monday Economic Report" from the NATIONAL ASSOCIATION OF MANUFACTURERS (NAM).

By Chad Moutray, Ph.D., CBE – August 15, 2022

NAM Weekly Economic Toplines:

According to the U.S. Energy Information Administration, the average cost of regular gasoline nationally was $4.038 per gallon on Aug. 8, the lowest price since Feb. 28. A similar measure from AAA reported that gasoline prices averaged $3.978 per gallon nationally last week, falling below $4 for the first time since early March. Lower energy prices helped moderate inflation measures in July. After soaring 1.3% in June, the fastest monthly increase since September 2005, consumer prices were flat in July. Declining energy costs, which fell 4.6% in July, helped provide some welcome relief, with gasoline prices off 7.7%. At the same time, food prices continued to grow solidly, up 1.1% for the month. The Consumer Price Index has risen 8.5% over the past 12 months, pulling back from 9.1% in June, which was the fastest since November 1981. Core inflation (which excludes food and energy) increased 5.9% year-over-year in July, the same pace as in June. Core inflation has decelerated since March (6.5%), which was the highest since August 1982, but continues to rise at a very strong pace. Overall, price pressures for consumers are likely to remain elevated over the coming months, but these data offered some comfort, with signs of possible cooling in inflationary pressures. With more favorable comparison months moving forward, core price growth on a year-over-year basis should continue to moderate somewhat, albeit at still-high rates. The current forecast is for year-over-year growth in the CPI to be 6.5% at year’s end, with core inflation at 5.0%. Likewise, producer prices for final demand goods and services fell 0.5% in July, pulling back from the 1.0% gain in June and declining for the first time since April 2020. Over the past 12 months, producer prices for final demand goods and services have risen 9.8%, down from 11.3% in June and the lowest year-over-year rate since October. Meanwhile, core producer prices increased 5.8% year-over-year, continuing to decelerate since hitting a record 7.1% in March but remaining highly elevated. These data will likely provide mixed comfort. On the one hand, it is encouraging to see some deceleration in these measures, but even with some easing, prices continue to rise at very elevated levels. For their part, manufacturers continue to cite rising raw material costs as their top challenge, followed closely by supply chain and workforce challenges. The Federal Open Market Committee might increase the federal funds rate by 50 basis points at its Sept. 20–21 meeting instead of the 75 basis-point hike that some were calling for after the strong labor market numbers the week before. Incoming data will help to frame the size of the rate hike not only in September, but also for the Nov. 1–2 and Dec. 13–14 meetings. My current view is that there will be 25 basis-point federal funds rate hikes at each of the final two FOMC meetings this year. Another complication for the Federal Reserve is falling labor productivity for nonfarm businesses, with soaring compensation and unit labor costs. With that said, manufacturing labor productivity jumped 5.5% at the annual rate in the second quarter, bouncing back strongly after declining in the three previous quarters on stronger output. After dropping to a record low in June (50.0), the Index of Consumer Sentiment has risen for two consecutive months, increasing from 51.5 in July to 55.1 in August, according to preliminary data from the University of Michigan and Thomson Reuters. Inasmuch as these data are highly correlated with falling gasoline prices, the increase should not be a surprise. READ FULL ECONOMIC REPORT