Slippin’ Into Inflation? PPI Unexpectedly Prints Hotter Than Expected Across The Board (PPI Final Demand Rose 2.4% YoY In October)

Slippin’ into (inflation) darkness … again. Producer price index (PPI) FINAL DEMAND rose 2.4% YoY in October.

After yesterday’s in line – but really cooler than whispered – CPI which restored hope in a December rate cut, all eyes are on this morning’s PPI print to boost dovish hopes that the Fed’s easing cycle would remain on track. It was not meant to be, however, as the PPI came in hotter than expected across the board on both a monthly and annual basis.

Starting at the top, headline PPI rose 0.2% MoM (in line with the +0.2% expected) but September was revised higher from 0.0% to 0.1%; meanwhile on an annual basis, headline PPI rose 2.4%, higher than the 2.3% expected, with the last month also revised higher from 1.8% to 1.9%.

Unlike last month when a drop in energy prices weighed heavily on the headline PPI number, this month energy subtracted just 0.02% from the final print, the lowest detraction since July. Meanwhile, Services added a hefty 0.179% to the bottom line number.

Indeed, according to the BLS, most of the rise in final demand prices can be traced to a 0.% advance in the index for final demand services. Prices for final demand goods inched up 0.1%, the first increase in the index since July.

Taking a closer look at the components:

Final demand services: The index for final demand services increased 0.3 percent in October after rising 0.2 percent in September. Over three-fourths of the broad-based advance in October is attributable to prices for final demand services less trade, transportation, and warehousing, which moved up 0.3 percent. The indexes for final demand transportation and warehousing services and for final demand trade services also increased, 0.5 percent and 0.1 percent, respectively. (Trade indexes measure changes in margins received by wholesalers and retailers.)

Product detail:

Over one-third of the rise in the index for final demand services can be traced to prices for portfolio management, which advanced 3.6 percent. The indexes for machinery and vehicle wholesaling; airline passenger services; computer hardware, software, and supplies retailing; outpatient care (partial); and cable and satellite subscriber services also moved higher.
In contrast, margins for apparel, footwear, and accessories retailing fell 3.7 percent. Prices for securities brokerage, dealing, investment advice, and related services and for truck transportation of freight also declined.

Final demand goods: The index for final demand goods inched up 0.1 percent in October following two consecutive decreases. The advance can be traced to a 0.3-percent rise in prices for final demand goods less foods and energy. Conversely, the indexes for final demand energy and for final demand foods declined 0.3 percent and 0.2 percent, respectively.

Product detail:

An 8.4-percent increase in the index for carbon steel scrap was a major factor in the advance in prices for final demand goods. The indexes for meats, diesel fuel, fresh and dry vegetables, and oilseeds also moved higher.
In contrast, prices for liquefied petroleum gas fell 18.1 percent. The indexes for chicken eggs, processed poultry, and ethanol also decreased.

Even more problematic for the doves, however, is that core PPI jumped to +3.1% YoY (hotter than the 3.0% exp) with the prior month revised higher to 2.9% from 2.8%. This was the second hottest print going back to March 2023 with just the June outlier surge hotter than October…

… as sticky Services costs continue to rise.

The hotter than expected PPIs have pushed yields and the dollar higher, even as the market waits to see the details of what impact today’s numbers will have on the Fed’s preferred core PCE metric – according to UBS key PPI components to PCE look hot – although Bloomberg noted a big jump in air passenger services (3.2%), which suggests some upside risks (i.e., 0.3% core PCE).

The most notable takeaway from the data appears to be the increase in final demand for services in October, which is similar to the factors that increased CPI yesterday — shelter, food and energy, which are components the Fed cannot control with interest rates.

Bottom line: this is a long way from the Fed’s mandated 2%, and it’s moving in the wrong direction, something which has not been lost on the market, where Treasury curves are flattening after the data, which suggests traders are wavering over the prospects of a December rate cut. That has yet to be reflected in rates markets — bets have been trimmed but marginally, not enough to really change the swaps market outlook as of now. According to BBG’s Vince Cignarella, sizeable block trades are going through Treasuries, mostly in the five-year tenor and some ten-year tenors, which looks like positioning for higher yields and flatter curves.

Tower Of Power? US Industries Are Buckling Under Pressure of Surging Electricity Costs (Industrial Electricity Costs UP 24.4% YoY)

The US is the expensive tower of power … but it should be cheap. Getting rid of coal power was idiotic and The Left’s fear of nuclear power is laughable.

EIA data by user classification, chart by Mish.

Rising energy bills have forced companies to scale back industrial operations, threatening a greater drag on the economy.

As of May, electrical energy costs are up 24.4 percent from a year ago. Producer Price Index (PPI) data suggests things are getting worse.

Please consider US Industrial Complex Is Starting to Buckle From High Power Costs

Europe’s fertilizer plants, steel mills, and chemical manufacturers were the first to succumb. Massive paper mills, soybean processors, and electronics factories in Asia went dark. Now soaring natural gas and electricity prices are starting to hit the US industrial complex.

On June 22, 600 workers at the second-largest aluminum mill in America, accounting for 20% of US supply, learned they were losing their jobs because the plant can’t afford an electricity tab that’s tripled in a matter of months. Century Aluminum Co. says it’ll idle the Hawesville, Kentucky, mill for as long as a year, taking out the biggest of its three US sites. A shutdown like this can take a month as workers carefully swirl the molten metal into storage so it doesn’t solidify in pipes and vessels and turn the entire facility into a useless brick. Restarting takes another six to nine months. For this reason, owners don’t halt operations unless they’ve exhausted all other options.

At least two steel mills have begun suspending some operations to cut energy costs, according to one industry executive, who asked not to be identified because the information isn’t public. In May, a group of factories across the US Midwest warned federal energy regulators that some were on the verge of closing for the summer or longer because of what they described as “unjust and unreasonable” electricity costs. They asked to be wholly absolved of some power fees—a request that, if granted, would be unprecedented.

Michael Harris, whose firm Unified Energy Services LLC buys fuel for industrial clients, says costs have risen so high that some are having to put millions of dollars of credit on the line to secure power and gas contracts. “That can be devastating for a corporation,’’ he says. “I don’t see any scenario, absent explosions at US LNG facilities’’ that trap supplies at home, in which gas prices are headed lower in the long term.

EIA Average Electricity Cost Cents

EIA Cost Data January 2021 vs May 2022

Residential: 12.69 to 14.92
Commercial: 10.31 to 12.14
Industrial: 6.39 to 8.35
Transportation: 9.61 to 10.79
All: 10.36 to 12.09

Those prices are through May 2022. Much electrical energy comes from natural gas.

US Natural Gas Futures

US gas prices fluctuated wildly in June and July. I suspect the average price is 7.33 or so for both months. Things are decidedly worse in Europe.

EU Natural Gas Price

From 25 or even 50 to 200 is one hell of a leap. It’s somewhere between 300% and 700% depending on your starting point vs 100% or so for the US.

Let’s now check the latest PPI data for a look at where things are and more importantly headed.

PPI Electrical Power Index 2020-Present

From pre-pandemic to January of 2021, the PPI electrical power index was flat. It has since surged on a relatively steady pace.

From May to July the index went from 231 to 238. That tacks on another three percentage points since the EIA report.

PPI Electrical Power Index 1991-Present

Long Term Trend

The long-term trend does not exactly look pretty.

And as Bloomberg noted, Century Aluminum Co. says it’ll idle the Hawesville, Kentucky, mill for as long as a year, taking out the biggest of its three US sites.

Reflections on Beer

Regarding the price of aluminum, please note America’s Beer CEOs Have Had It With the Trump-Era Aluminum Tariffs

The beer industry uses more than 41 billion aluminum cans annually, according to a Beer Institute letter to the White House dated July 1.

“These tariffs reverberate throughout the supply chain, raising production costs for aluminum end-users and ultimately impacting consumer prices,” according to the letter signed by the CEOs of Anheuser-Busch, Molson Coors, Constellation Brands Inc.’s beer division, and Heineken USA.

This letter to the president comes amid the worst inflation in more than 40 years and just months after aluminum touched a multi-decade high. Prices for the metal have since eased significantly.

Whatever victory beer makers and drinkers may have with aluminum prices may not last with US aluminum plants shutting down.

Then again, the cure for everything is likely to be a huge recession.

Zero Consumer Inflation

I am pleased to report there was no consumer inflation in July.

For discussion, please consider CPI Month-Over-Month Was Unchanged, Year-Over-Year Up 8.5 Percent

The CPI report resulted in a nonsensical Twitter debate on the meaning of zero. For the record, assuming you believe the numbers, there was indeed zero inflation month-over-month.

The accurate rebuttal is: One month? So what?

Moreover, zero is not as good as it looks. All of it was due to a 7.7 percent decline in the price of gasoline. And year-over-year inflation was a hot 8.5 percent.

Meanwhile, rent and food keep rising and the price of rent will be sticky. Gasoline is more dependent on recession and global supply chains.

Food Prices Rise Most Since February 1979

For more on the price of food, please see Food at Home is Up 13.1 Percent From a Year Ago, Most Since February 1979

For more on rent, please note Tennant’s Unions Demand Biden Declare a National Emergency to Stop Rent Gouging

For more on producer prices please see Producer Prices Decline For the First Time Since the Pandemic Due to Energy

Although energy declined, electricity didn’t.

Spotlight on Fed Silliness

The above reports and this one industrial costs puts a spotlight on the silliness of the Fed’s focus on consumer inflation as if that’s all that matters.

The Fed has blown three consecutive bubbles trying to produce two percent consumer inflation while openly promoting raging bubbles in assets and missing the boat entirely on industrial matters.

Going Down! US Producer Prices Rise At Fastest Pace In 15 Months As Services Costs Soar (Buying Conditions For Housing Hit All-time Low!)

We’re going down!

After May’s MoM deflationary impulse (thanks to a plunge in energy costs), June was expected to see a modest 0.1% rise (and we have seen energy prices starting to rise again). Sure enough, headline PPI printed HOT at +0.2% MoM (and May was revised higher), pushing the YoY print up to 2.6% (well above the 2.3% expected)…

Source: Bloomberg

That is the highest PPI since March 2023.

Core PPI rose by 0.4% MoM (double the 0.2% exp), sending the YoY price rise up by 3.0% (also the hottest since March 2023)…

Source: Bloomberg

The jump in PPI was driven by a resurgence in Services costs as Energy remains deflationary (for now)…

Source: Bloomberg

The June rise in the index for final demand can be traced to a 0.6-percent increase in prices for final demand services. In contrast, the index for final demand goods decreased 0.5 percent