Producer Prices Rose Faster than Expected in July

Producer prices jumped by more than expected. Some economists think it could be the peak rate of increase, but the spread of the Delta variant poses a big uncertainty.

Why it matters: Producer prices reflect what businesses pay for the materials that go into the stuff they eventually sell to their customers. Higher producer prices put more pressure on businesses to pass those costs on through consumer price hikes.

• Much of the rise in inflation in recent months has been attributed to transitory factors like supply chain bottlenecks stemming from COVID-related disruptions like labor shortages and company shutdowns.
• Persistent inflation, however, could prove increasingly disruptive as it weakens the purchasing power of businesses and consumers.

By the numbers: The core Producer Price Index, which excludes food and energy, jumped by 1% in July from June. This was much hotter than the 0.5% expected by economists.

• The gain represents a 6.2% increase from a year ago.
• The data marked a divergence from the July Consumer Price Index report, which showed core consumer prices rise just 0.3% month over month or 4.3% year over year.

Yes, but: "Stubborn pandemic disruptions will continue to hamper supply through year-end, keeping producer prices sticky and prompting the Fed to begin QE tapering in early 2022," Oxford Economics U.S. economist Mahir Rasheed said.

Zoom out: Extrapolating from July’s PPI and CPI reports, Morgan Stanley economist Ellen Zentner estimates that core PCE, the Fed’s preferred measure of inflation, climbed by 0.38% month over month. This would represent a 3.6% increase from year-ago levels.

The bottom line: Many economists continue to argue that the forces boosting inflation are transitory. However, the data has yet to prove that decisively, and any inflationary supply-chain-related disruptions only complicate the debate.

Written by:  Sam Ro, Markets Correspondent for Axios, for Axios.com.