Inflation at the wholesale level surged by the largest amount in nine months in July, with soaring energy costs again the culprit. The rise strengthened expectations that the Federal Reserve will continue to hike short-term interest rates for the rest of this year.
The Producer Price Index, released early Wednesday by the Labor Department, showed that prices paid to U.S. producers rose by 1 percent in July, higher than most forecasts. Besides energy, the rise also reflected hikes in prices for wholesale drugs and new cars.
The index, also known as the PPI, measures prices before they're passed on to U.S. consumers.
Taking out energy and food costs, the so-called core PPI increased 0.4 percent, the most since January.
"The jump . . . is all about energy, a story which everyone should have been painfully aware," said economist Stephen Stanley from investment firm Greenwich Capital Management in an e-mailed commentary. Energy prices rose by 4.4 percent in July; gasoline prices were up 10.9 percent, the biggest rise since last October.
Today's numbers make further Fed hikes a "foregone conclusion," said Matt Martin, senior economist at consulting firm economy.com. "They [the Fed] have been telegraphing their moves pretty well. At least at the next couple of meetings, we know what's going to happen."
On Tuesday, the government released what is known as the consumer price index, or the CPI, which measures the prices consumers are paying. The CPI was up 0.5 percent in July - the most in three months -- largely because of surging energy costs.
But the core CPI, excluding food and energy, edged up only 0.1 percent, because consumers found lower prices on other items, like heavily discounted new vehicles, clothing, televisions and audio equipment, personal computers and telephone services.
"We have the luxury of knowing that the core CPI was reasonably benign, so we can afford to stay relaxed despite these seemingly ugly PPI data," said Stanley from Greenwich Capital Management.
The biggest difference in the two reports was in the measurement of new car prices. Car prices fell by 1 percent for consumers while they rose 1.5 percent in the wholesale price report. Analysts explained that discrepancy by saying that the wholesale report caught incentive offers in June while the consumer report didn't start picking up those incentives until July on the consumer level.
The U.S. economy has grown at a healthy pace this year and even showed signs of gaining momentum in recent weeks, despite a 14.2 percent rise in energy prices over the year that ended in July. But many analysts remain concerned that the expansion may slow sharply if rising energy prices force consumers to cut their spending on other items and cause businesses to pull back on new investments.
Producer prices were up 4.6 percent for the 12 months that ended in July compared with a 3.6 percent gain in the 12 months that ended in June. Core prices were 2.8 percent higher compared with a 2.2 percent year-over-year increase in June. The year-over-year rise in July was the biggest since November 1995.