Headline PPI edges up, core PPI growth moderates, but remains near its all-time high

Headline PPI edges up, core PPI growth moderates, but remains near its all-time high

* The U.S. Producer Price Index (PPI) for final demand ticked up 0.6% in September, the 13th consecutive monthly increase, lifting its yr/yr rise to a strikingly high 8.6%, bolstered by sharp increases in food and energy prices. Core PPI for final demand (excluding energy, food, and trade services components), which is a better gauge of underlying price trends increased 0.1%, which lowered its yr/yr rise to 6% from 6.3% (Chart 1). Despite the moderation in core PPI, price pressures are elevated and are likely to remain so as supply chain disruptions will take a substantial time to unwind.

* Strong product demand for goods in tandem with supply constraints contributed to the 1.25% m/m increase in the PPI for final demand goods, which lifted its yr/yr increase to a new all-time high of 13.3% (Chart 2). The service sector which has been disproportionately affected by the delta variant driven surge in COVID-19 cases experienced more moderate price increases: the PPI for final demand services increased 0.2% and the yr/yr stabilized at an all-time high of 6.4%. On a three-month annualized basis, final demand goods and final demand services prices increased 12% and 8.2% respectively. Taken together, the increases in producer prices across both goods and services point to a still brimming inflationary pipeline which will exert further upwards pressure on consumer prices.

* Food and energy prices, which are particularly volatile have spiked in recent months: the PPI for final demand foods increased 2% after a 2.9% rise in August, while final demand for energy increased 2.8% m/m lifting its yr/yr increase to 36.3% (Charts 3 & 4). Recent increases in energy commodity prices are beginning to be reflected in measures of producer and consumer energy prices, and further near-term increases in the energy components of the PPI are likely. Further producer price increases in these components will translate into rising food and energy prices for consumers, and lift headline consumer price measures. Moreover, food and energy prices play an outsize role in the formation of short-to-medium term consumer inflationary expectations, and sustained increases in food and energy prices should contribute to rising inflationary expectations.

* The recent increases in producer prices are remarkably high, particularly when viewed in a historical context using the PPI’s old methodology. According to the old methodology, finished goods excluding food and energy increased to 5.2% yr/yr in September, a 35+ year high (Chart 5). Similarly, the yr/yr increase in intermediate materials less food and energy edged up to 21.6%, its highest level since 1975.

* To date, businesses have been passing on some portion of their higher costs of production to consumers. Looking forward they will maintain the flexibility to do so if product demand remains strong

Chart 1: Core PPI & Headline PPI

Chart 2: PPI Final Demand Services & Final Demand Goods

Chart 3: PPI Final Demand Foods

Chart 4: PPI Final Demand Energy

Chart 5: Old methodology - Core PPI Finished Goods & Core PPI Intermediate Goods

Mickey Levy, mickey.levy@berenberg-us.com

Mahmoud Abu Ghzalah, mahmoud.abughzalah@berenberg-us.com

© 2021 Berenberg Capital Markets, LLC, Member FINRA and SPIC

Remarks regarding foreign investors. The preparation of this document is subject to regulation by US law. The distribution of this document in other jurisdictions may be restricted by law, and persons, into whose possession this document comes, should inform themselves about, and observe, any such restrictions. United Kingdom This document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers. Copyright BCM is a wholly owned subsidiary of Joh. Berenberg, Gossler & Co. KG (“Berenberg Bank”). BCM reserves all the rights in this document. No part of the document or its content may be rewritten, copied, photocopied or duplicated in any form by any means or redistributed without the BCM’s prior written consent. Berenberg Bank may distribute this commentary on a third party basis to its customers.

Member FINRA & SIPC
This email and any files or attachments transmitted with it may contain confidential or privileged information and are intended solely for the use of the intended recipient. If you are not the intended recipient, please do not copy, retain, disclose or use any part of the message or its attachments. Please notify the sender immediately by return email and destroy or delete any copies. Dissemination or use of this information by anyone other than the intended recipient is unauthorized and may be illegal. Communications by email cannot be guaranteed to be secure or error-free. Emails and their attachments are subject to being intercepted, becoming corrupted, getting lost or delayed, or may contain viruses. Therefore, neither the sender nor Berenberg Capital Markets LLC (BCM) accepts any liability for any errors or omissions in the content of this message or problems in its transmission, including those arising as a result of its transmission over the internet.
BCM does not assume liability for the correctness and completeness of all information given and/or attachments contained herein. The provided information has not been checked by a third party, especially an independent auditing firm. BCM explicitly points to the stated date of preparation. The information given can become incorrect due to passage of time and/or as a result of legal, political, economic or other changes. BCM does not assume responsibility to indicate such changes and/or to publish an updated document. Any document(s) or attachment(s) is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers.
In light of upcoming regulatory changes, please be informed that BCM will continue to share information with you until unsubscribe@berenberg-us.com receives your termination/deletion request. For more information about the General Data Protection Regulation (GDPR) and our privacy policies please refer to https://www.berenberg-us.com/legal-notice. BCM reserves all the rights in this communication. No part of this communication or its content may be rewritten, copied, photocopied or duplicated in any form by any means or redistributed without BCM’s prior written consent.
The information contained herein and sourced may have been adopted from various news sources, for example, Bloomberg, Reuters, Street Account and various other sources. BCM does not claim accuracy, completeness, timeliness, suitability, or otherwise regarding all the information on the securities, stock markets, or developments referred to within. On no account should the Content be regarded as a substitute for the recipient procuring information for himself/herself or exercising his/her own judgments. BCM is not responsible for any recipient(s) use of this information. This Content is not a solicitation or an offer to buy or sell any of the securities contained herein. This information does not constitute a recommendation or take into account the particular investment objectives, financial situations, or needs of clients. Clients should consider whether any advice or recommendation in this Content is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of securities which may be referred to in this Content and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain securities.