U.S. Producer price inflation remained modest in August

*The U.S. Producer Price Index (PPI) for final demand increased by 0.3% m/m in August, lifting its yr/yr change to -0.2% from -0.4%, well above its low of -1.5% yr/yr in April, but below its pre-pandemic average of 1.6% (Chart 1). In August, declines in energy (-0.1% m/m) and food (-0.4% m/m) prices were offset by a sizable jump in trade services prices (+1.2% m/m), which measures changes in margins and tends to be volatile.

*Core PPI for final demand (excluding volatile food, energy, and trade services components), a better gauge of the underlying price trend, increased by 0.3% m/m for the third consecutive month in August, lifting its yr/yr change to 0.3% from 0.1%, remaining well below February’s yr/yr increase of 1.4% (Chart 2).

*Inflation is likely to remain low over the next year as the effects of the pandemic dominate. Beyond 2021, the path of inflation depends on fiscal policy, the Fed’s monetary policy, in particular its desire for above-2% inflation, and inflation expectations.

Pipeline inflationary pressures remained benign in August: 1) inflation for unprocessed goods (excluding food and energy) used as inputs to production increased to 5.7% yr/yr from 3.2%; 2) prices for processed goods used as inputs declined by 1.1% yr/yr (Chart 3); and 3) prices for intermediate demand services declined by 0.6% yr/yr (Chart 4).

Notably, 45% of the 66 key PPI components declined (yr/yr) in August and only 14% increased by more than 4% yr/yr (Chart 5). Industries reporting the fastest increases in selling prices are those in which demand has bounced back strongly: wood products manufacturing (+12.2% yr/yr), electronics and appliance stores (+11.7%), building material and garden equipment/supply dealers (+10.2%), office supplies, stationery and gift stores (+9.7%), food and beverage stores (+6.5%), gasoline stations (+6.1%), motor vehicle and parts dealers (+5.6%), legal services (+5.2%), and commercial machinery repair and maintenance (+4.4%).

The sharp decline in activity and subsequent rebound are leading to near-term volatility in prices. Indeed, although the three-month annualized change in the core PPI increased to 3.3% from 2.2%, the six-month annualized change was -0.4% (Chart 6). We expect the core PPI to climb above 1% yr/yr in coming quarters.

The personal consumption component of the PPI increased by 0.3% m/m. Based on its past relationship with the CPI, it indicates a 0.2% m/m increase in the CPI in August, which would lift its yr/yr change to 1.2% from 1.0% (August CPI is set for release tomorrow, September 11). See Chart 7.

Chart 1:

Chart 2:

Chart 3:

Chart 4:

Chart 5:

Source: Bureau of Labor Statistics and Berenberg Capital Markets

Chart 6:

Chart 7:

Roiana Reid, roiana.reid@berenberg-us.com

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.