The Bureau of Labor Statistics reported on May 13 that the Producer Price Index surged 6% year-over-year, the highest reading since November 2022 and well above the 5.2% consensus estimate. The energy component was the primary culprit, with fuel costs spiking 18.4% as Strait of Hormuz shipping disruptions from the Iran conflict continued to roil global oil markets.
Core PPI, which strips out food and energy, came in at 3.2% -- also above the 2.9% estimate and the highest since March 2023. The data follows April's CPI print of 3.8% and confirms what bond traders have feared for months: the inflation problem is not only unresolved, it is getting worse. The 10-year Treasury yield surged to 4.52% on the release.
What happened
The May PPI report showed broad-based price pressures across the producer economy. Headline PPI rose 6.0% year-over-year and 0.8% month-over-month, both significantly above expectations of 5.2% and 0.5% respectively. The energy component drove the headline number, with gasoline prices up 22.1% and diesel up 19.7% year-over-year, directly linked to supply disruptions in the Strait of Hormuz where Iran-backed forces have been interdicting tanker traffic since February. Food prices rose 4.1%, with grains and processed meats leading the increase. Core PPI at 3.2% was the real worry for Fed watchers, as it strips out the volatile energy and food components and reflects underlying pipeline inflation that will eventually flow through to consumer prices.
Why it matters
The 6% PPI print puts the Federal Reserve in what economists are calling a policy trap. With inflation accelerating and growth decelerating -- Q1 GDP was revised down to 1.8% -- the classic stagflation scenario that the Fed's toolkit is least equipped to handle is materializing. Incoming Chair Kevin Warsh inherits an economy where cutting rates to support growth would risk entrenching inflation, while hiking rates to fight inflation would risk tipping a fragile economy into recession.
Market impact
Bond markets reacted violently to the PPI data. The 10-year Treasury yield jumped 12 basis points intraday to 4.52% before settling at 4.48%, while the 2-year yield rose 8 basis points to 4.71%. TLT