U.S. Energy Prices Push U.S. Producer Price Index Up 0.8% in June

• The US producer price index (PPI) jumped 0.8% in June 2013, which was above market expectations for a 0.5% gain and marked a second consecutive sizeable increase following a 0.5% rise in May. The monthly increase pushed the year-over-year rate of growth in the measure to 2.5% from 1.7% in May.
• As was the case in May, the headline index was pushed higher by rising energy prices in June by 2.9%, which was stronger than the already large 1.3% May increase. Food prices rose by 0.2%, which was a modest increase but below the 0.6% gain posted in May.
• Excluding both the volatile food and energy components, core PPI rose a modest 0.2% in June with the year-over-year rate holding steady at 1.7% for a fourth consecutive month.
• The jump in producer price growth in June largely reflected a second consecutive sizeable gain in the volatile energy component. This pressure on energy prices, at least at the producer level, appears to have eased in July with prices stabilizing somewhat month to date. Moreover, outside of the often volatile energy and food components, the modest annual pace of growth in core producer prices still suggested that despite a recent pickup in job growth, excess capacity in labour markets is keeping a lid on underlying inflation pressures, which will leave the Federal Reserve free to maintain a highly stimulative monetary policy stance. We still expect the Fed to begin to taper its pace of bond purchases later this year; however, the first hike in the federal funds rate remains unlikely until mid-2015.

Producer prices jumped 0.8% in June 2013, which was a faster pace of increase than the already sizeable 0.5% increase in May. As was the case in the previous month, most of the increase in June reflected higher energy prices, which jumped 2.9% following a 1.3% gain in May. Gasoline prices surged 7.2% with the annual rate of increase jumping to 2.9% from -2.4 % in May. Food prices rose a modest 0.2% following a 0.6% gain the prior month.

Excluding both the volatile food and energy components, core producer prices rose a modest 0.2%, although this was still up from the 0.1% increases in May and April. A 0.8% rise in the price of cars was a ‘major contributor’ to the June increase.

On a year-over-year basis, the rate of increase in the overall PPI index climbed to 2.5%, which was the fastest pace of annual price growth since March 2012. Core price growth, however, remained modest with the year-over-year rate of growth in the measure holding steady at 1.7% for a fourth consecutive month.

The jump in producer price growth in June largely reflected a second consecutive sizeable gain in the volatile energy component. This pressure on energy prices, at least at the producer level, appeared to have eased somewhat in July with prices stabilizing month to date. Moreover, outside of the often volatile energy and food components, the modest annual pace of growth in core producer prices still suggested that despite a recent pickup in job growth, excess capacity in labour markets is keeping a lid on underlying inflation pressures, which will leave the Federal Reserve free to maintain a highly stimulative monetary policy stance. We still expect the Fed to begin to taper its pace of bond purchases later this year; however, the first hike in the federal funds rate remains unlikely until mid-2015.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.

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