Olivia Rockeman

Producer prices in US surged in June

Prices paid to U.S. producers rose in June by more than expected, indicating pressure is mounting on companies to pass along higher costs to consumers. The producer price index for final demand increased 1 percent from the prior month and 7.3 percent from June of last year, Labor Department data showed July 14. Excluding volatile food and energy components, the so-called core PPI also rose 1 percent, the most on record, and was up 5.6 percent from a year ago. The median forecasts in a Bloomberg survey of economists called for a 0.6 percent month-over-month advance in the overall PPI and a 0.5 percent increase in the core figure. The annual increases were the largest in data back to 2010. The PPI, which tracks changes in the cost of production, has accelerated at a faster pace than expected in recent months due to higher commodity prices and complications with global supply chains. Challenges in hiring skilled workers have also put upward pressure on wages. The increases in production and labor costs help explain why the pace of consumer inflation has exceeded economists’ estimates in each of the last four months. A report July 13 showed the consumer price index surged in June by the most since 2008. The increase was primarily in categories associated with reopening, including hotel stays, car rentals and airfares. Federal Reserve officials have said upward pressure on prices is likely to be transitory, but some investors worry the recent gains will lead to more persistent inflation. “Strong demand in sectors where production bottlenecks or other supply constraints have limited production has led to especially rapid price increases for some goods and services, which should partially reverse as the effects of the bottlenecks unwind,” Fed Chair Jerome Powell said July 14 in prepared remarks to lawmakers. The S&P 500 rose, the 10-year U.S. Treasury yield retreated below 1.4 percent and the dollar declined after Powell’s remarks. The PPI report showed prices for goods increased 1.2 percent after a 1.5 percent advance in the prior month, while the cost of services rose 0.8 percent, the most since the start of the year. Almost 60 percent of the overall PPI advance was due to services, according to the Labor Department. The increase in the costs of services reflected growth in margins received by wholesalers and retailers. Liquefied petroleum gas, plywood, aluminum base scrap were among goods that climbed by double digits from a month earlier. Producer prices excluding food, energy, and trade services — a measure often preferred by economists because it strips out the most volatile components — rose 0.5 percent from the prior month and increased 5.5 percent from a year earlier. The annual gain was the largest on data back to 2014. In an earnings call July 13, packaged food company Conagra Brands Inc. reported a 8.6 percent increase in the cost of goods sold for its most recent quarter, with expectations for a rate of about 9 percent for fiscal year 2022. “The bulk of this inflation can be attributed to continued increases in the cost of edible fats and oils, proteins, packaging, and transportation,” Chief Financial Officer David Marberger said on the call.

Inflation on the menu as US restaurants pass on soaring costs

U.S. restaurants, faced with higher food and labor costs, are raising menu prices at a much faster pace than historical rates, insistent on preserving profits after an arduous year. From local restaurants to national chains like Chipotle Mexican Grill Inc., owners have boosted prices by as much as 5 percent in the past few weeks alone. Even at fast-food companies that were locked in price wars just a couple of years ago to win over cost-conscious consumers, increases aren’t taboo anymore. “We are going to be paying higher prices in restaurants,” said David Henkes, senior principal at industry researcher Technomic. “Part of the calculus right now is there’s probably some appetite of consumers to pay whatever because they haven’t been out for a while.” Across the nation, prices for food away from home rose 4 percent in May from a year earlier, the biggest jump since May 2009. It’s one example of a surge in overall inflation that’s left policy makers at the Federal Reserve debating how long the cost pressures will last as the economy bounces back from the COVID-19 pandemic. In the Tampa, Fla., area, restaurateur Andrew Koumi bumped up his menu items by 2 percent to 4 percent. Koumi, founder of a six-location chain called Green Market Cafe, tries to keep food and paper costs below 35 percent of his menu prices, but lately his computers keep flagging items that go above that parameter. He’s paying twice as much to buy chicken as he was in January, and other meats and paper products have gotten more expensive too. Koumi isn’t too worried about standing out with his price increases, because “everyone’s doing it. Some people are doing it really drastically,” he said. “Could it go up more? It’s scary. I’m hoping that it levels.” For now, there’s no sign of abating. Chipotle recently raised menu prices by as much as 4 percent, after increasing average pay to $15 an hour and hiring thousands of workers to keep up with demand. American homestyle chain Cracker Barrel Old Country Store Inc., which earlier this year raised menu prices by 2.8 percent, is bumping up that increase to about 3 percent amid continued pressure from wage and commodity expenses, including pork for sausage and bacon. McDonald’s Corp., which raised its hourly wage by about 10 percent in May, hasn’t announced any jump in prices yet but said early this year that franchisees could handle labor inflation “between judicious pricing on the menu as well as just thinking about productivity savings.” Historically, restaurant operators tend to raise menu prices a few times a year. Between 2015 and 2019, that amounted to increases of about 2.5 percent, according to BTIG LLC analyst Peter Saleh. This year, the rate may reach about 4 percent, Saleh wrote in a note to investors. Although food costs will likely moderate once supply bottlenecks are resolved, higher wages and labor shortages will persist even after pandemic relief has dried out, because people are yearning for greater work-life balance and flexibility in a post-COVID-19 world, Saleh wrote. That will create “inflation that in our view is not transitory,” Saleh said. Whether higher prices are here to stay or just a temporary blip amid a fast reopening of the economy is at the center of a hot debate in the U.S. Federal Reserve Chair Jerome Powell said at a Congressional hearing June 22 that price increases recently are larger than expected but reiterated that they will eventually wane. While commodity prices such as lumber have come down, food costs have continued to surge. U.S. producer prices for processed poultry jumped to an all-time high in May. Some chains are coming up with creative solutions to avoid raising prices. Wingstop Inc., for one, is only planning its typical 1 percent to 2 percent menu price increase this year. To save costs, the company is now buying whole birds instead of cut-up legs and breasts, selling less-used thigh pieces from a new delivery and takeout brand. “The big price increases — the 4 percent price increases you’re seeing other chains do — that won’t be us,” CEO Charlie Morrison said in an interview. “Large price increases that are promoted and then passed on to the consumer tend to have a negative reaction.” For smaller businesses, there is often little choice. In Atlanta, restaurateur Bill Goudey raised prices by as much as 5 percent on some items a few weeks ago, steeper than the 1 percent increase he’s more comfortable with. The last few months have been chaotic at his two Copeland’s of New Orleans franchises. Workers have been so scarce that customers have had to wait for a table for up to two hours some weekends. “While we’re hopeful some of these are short term and supply chain related, many are longer term cost concerns that could take months to resolve,” Goudey said in an email.

US inflation expectations build in June survey of economists

Economists’ inflation expectations keep rising as a variety of key metrics underscore building price pressures. Forecasters raised their estimates for the consumer price index and for a key inflation gauge favored by the Federal Reserve, known as the personal consumption expenditures price index, every quarter through the first half of next year, according to the latest monthly survey of economists by Bloomberg. Compared to a year earlier, the CPI is now forecast to remain greater than 3 percent through March 2022, peaking at a 4.3 percent year-over-year gain in the current quarter, according to the median forecast in a June 4-9 survey of 77 economists. Data out June 10 showed the gauge rose more than expected for a third straight month. The PCE price index is expected to rise 3.5 percent in the April to June period, up from the 3 percent estimate in the May survey and well above the Fed’s 2 percent goal. While rising fuel prices may in part help explain the upgrades to inflation, metrics excluding food and energy are also being adjusted higher. Faced with a surge in demand, supply bottlenecks and rising input costs, many businesses have raised their prices to protect their profit margins. Whether those increases will lead to a more persistent inflationary trend has divided economists and market participants. “Supply capacity should eventually catch up, but this could take time with the risk that we see more elevated inflation readings for longer than we have experienced at any point in the past 20 years,” said James Knightley, chief international economist at ING. Fed officials have repeatedly said they expect the price pressures to prove temporary. As a result, they’ve given no indication that they’re ready to taper bond purchases or raise rates in the foreseeable future. So far, economists surveyed by Bloomberg also appear to see the pop in prices as somewhat temporary. Expectations for annual gains in both CPI and PCE are holding near 2 percent in the second half of next year. Economists also boosted their outlook for gross domestic product growth for the rest of this year, but the reasons for the upward revisions differ by quarter. GDP is now projected to grow 10 percent in the second quarter, driven by stronger consumer spending than originally projected last month. But growth in the back half of the year reflects higher estimates for private investment growth. That category includes spending on capital goods by businesses as well as residential investment. Forecasters raised their projections for private investment by a full percentage point to 8.6 percent in the July to September period.

US recovery’s surprise strength linked to aid, quick reopening

The U.S. economic recovery’s strength has consistently surprised over the past several months, thanks in part to steadfast consumer finances that were underpinned by robust government aid and ultra-low interest rates. Three months ago, economists were penciling in third-quarter growth at an annualized 18 percent. The latest Bloomberg survey of economists now shows a median projection almost double that — a record 31.8 percent pace — for the report due Oct. 29. Even with such an outsize quarterly improvement, the economy still has its work cut out for it as the value of output will remain below the previous peak of $21.7 trillion at the end of 2019. Unemployment is more than double pre-crisis levels and COVID-19 is expected to restrain growth for months and possibly years to come. A confluence of factors, though, helps explain why economists underestimated the rebound so far. For starters, some states’ COVID-19-related business lockdowns were lifted within weeks rather than months, allowing for a quick rebound in retail sales. The government’s response — particularly in sending many Americans $1,200 stimulus checks in April and adding $600 PER week to unemployment benefits for several months — was also key and may have been more effective than first estimated. In addition, American households had more savings as income growth outpaced spending even after subtracting government assistance. Moreover, the rapid changes to the economy spurred analysts to rely increasingly on data from so-called high-frequency indicators such as restaurant bookings and mobile-phone movements. That allowed a more real-time picture of the recovery but also made forecasting trickier for analysts accustomed to computer models that incorporate traditional indicators. The high-frequency data have “given some head fakes here and there,” said Brett Ryan, senior U.S. economist at Deutsche Bank AG. Total receipts at retailers are well above their pre-pandemic levels, while single-family housing starts and previously owned home sales are the strongest in more than 13 years. Regional manufacturing data show orders continue to mount, in part because inventories were drawn down to lean levels. Record-low mortgage rates are driving demand in the housing market, but it has also enjoyed a shift in Americans’ living preferences — leaving city centers in favor of the suburbs and roomier homes that can also double as personal office spaces. “People were not sufficiently upbeat about the consumer,” said Stephen Stanley, chief economist at Amherst Pierpont Securities, who now sees 34.1 percent third-quarter growth after forecasting 18 percent in April. “There were a lot of concerns that the fiscal stimulus in the spring boosted consumption temporarily and that as soon as that flow of money stopped that the consumer would stop spending.” To be sure, the economy is projected to settle back into a more moderate growth pace through the end of the year. A resurgence in coronavirus cases and the extended deadlock over fresh stimulus threaten to limit further gains, while the timing and effectiveness of COVID-19 vaccines remains uncertain. Even so, some measures help explain just how much analysts have underestimated the economy’s progress. Surprise indexes from Citigroup Inc. and Bloomberg — which measure the degree to which analysts under- or over-estimate trends — have been consistently positive since early June. “Retail sales, industrial production, the PMIs, earnings, employment have all performed better than we had expected. So it’s a pretty broad-based gain,” said Stan Shipley, an economist with Evercore ISI. Shipley added that plenty of the economy’s outperformance has roots in government stimulus. The biggest surprise of all came earlier in the pandemic. The May jobs report in early June showed employers added 2.5 million workers to payrolls, compared with a median projection for a loss of 7.5 million. Economists were wrongfooted by jobless-claims numbers that showed millions of Americans losing their jobs; they missed the greater number who were being hired or rehired. Since then, the unemployment rate has also declined faster than forecast, though September’s payrolls gain of 661,000 trailed projections. Jobless claims remain above their pre-pandemic levels — worse than expectations for a steeper decline by now — and the number of people who are permanently out of work is at a seven-year high. At the same time, the latest retail sales data were surprisingly solid: Purchases increased 1.9 percent in September, the most in three months and exceeding all but three of the 75 estimates in the Bloomberg survey. “People just got too pessimistic on the economy,” Joseph Lavorgna, special assistant to President Donald Trump and chief economist at the National Economic Council, said in an interview last week. Government policies “are very successful, growth has come roaring back” and virus treatments will boost the economy further, he said. Democratic challenger Joe Biden, for his part, said during the Oct. 22 debate with Trump that to help the economy, he would seek to limit virus transmission through targeted shutdowns and distancing measures. Biden also highlighted getting money to schools to help them reopen. Whoever wins the presidential election will have more work to do on the economic recovery even if the data continue to surprise on the upside.
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