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Tense supply chains keep producer prices down in the United States

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Producer prices in the United States rose sharply in August, resulting in the biggest annual gain in nearly 11 years, suggesting high inflation is likely to persist for some time as the relentless COVID-19 pandemic continues to put pressure on supply chains.

Strong supply and demand constraints were underscored by other data on Friday showing that the pace of inventory build-up at wholesalers slowed in July. It now takes wholesalers the fewest months in seven years to clear the shelves.

“Supply chain bottlenecks have persisted longer and more intensely than expected earlier this year, and widespread labor shortages are among the main input issues producers face. “said Will Compernolle, senior economist at FHN Financial in New York. “This means that consumer price inflation is expected to stay high for some time.”

The producer price index for final demand rose 0.7% last month after two consecutive monthly increases of 1.0%, the Labor Department said. The gain was led by a 0.7% advance in services after jumping 1.1% in July.

A 1.5% increase in commercial services, which measures changes in margins perceived by wholesalers and retailers, explains two-thirds of the overall increase in services. Goods prices jumped 1.0% after rising 0.6% in July, with food rebounding 2.9%.

Prices for transportation and warehousing climbed 2.8%.

The latest global wave of COVID-19 infections, driven by the Delta variant of the coronavirus, has disrupted production at factories in Southeast Asia, the main suppliers of raw materials for manufacturers in the United States. Congestion at Chinese ports is also increasing pressure on US supply chains.

In the 12 months to August, the PPI accelerated 8.3%, the biggest year-over-year gain since November 2010, when the series was revamped, after surging by 7.8% in July.

Economists polled by Reuters predicted the PPI would gain 0.6% on a monthly basis and rise 8.2% year-on-year.

Stocks on Wall Street were down. The dollar remained stable against a basket of currencies. US Treasury prices have fallen.

LOGISTICS DELAYS

Although surveys by the Institute for Supply Management this month showed that measures of prices paid by manufacturers and service industries fell significantly in August, they remained elevated. Factories and service providers continue to struggle to find labor and raw materials, and face logistical delays.

This was corroborated by the Federal Reserve’s Beige Book report released on Wednesday from information gathered no later than August 30, showing that “contacts reported generally higher input prices but, as for labor- of labor, they were primarily concerned with getting the supplies they needed relative to the price. “

Supply bottlenecks make it more difficult for companies to replenish after running out of stocks in the first half of the year. In a separate report released on Friday, the Commerce Department said wholesalers’ inventories rose 0.6% in July after jumping 1.2% in June. Sales increased 2.0%. At the rate of sales in July, it would take 1.20 months for wholesalers to empty the shelves, the smallest since July 2014, against 1.22 in June.

“Producers are struggling to replenish their stocks in the face of growing demand,” said Matt Colyar, economist at Moody’s Analytics in West Chester, Pa.

With tight stocks, producers easily pass the higher costs on to consumers. Federal Reserve Chairman Jerome Powell has firmly maintained that high inflation is transient.

While most economists share this view, some argue that strong wage growth due to the tight labor market suggests that inflation may be more persistent.

“Today’s wholesale pricing data should be revealing for the Fed, as inflationary pressures still do not appear to ease and will likely continue to be felt by consumers in the months to come,” said Charlie Ripley, Senior Investment Strategist at Allianz Investment Management.

The Fed’s preferred inflation measure for its flexible 2% target, the basic personal consumption expenditure price index, rose 3.6% in the 12 months to July after a similar gain in June. Next week’s data will likely show the consumer price index to rise 0.4% in August and 5.3% year-on-year, according to a Reuters survey.

High inflation and supply constraints, which caused motor vehicle sales to plummet in August, prompted economists to cut their estimates of gross domestic product growth in the third quarter to an annualized rate of 3.5% from 8.25%. The economy grew at a rate of 6.6% in the second quarter.

“The danger with inflation is that once prices go up they don’t come back down and the economy, producers and consumers all have to live in a more expensive world where many cannot afford. more than barely surviving, ”said Chris Rupkey, chief economist at FWDBONDS in New York.

There are signs, however, that inflation is probably near its peak. Excluding the volatile components of food, energy and commercial services, producer prices rose 0.3%, the smallest increase since last November. The core PPI jumped 0.9% in July.

In the 12 months to August, core PPI accelerated 6.3%. This is the largest increase since the government introduced the series in August 2014 and follows a 6.1% increase in July.

Details of the PPI components, which feed into the core PCE price index, were mixed. Health spending fell 0.2%. Portfolio management fees rose 1.1% and airline tickets rose 8.9% after rising 9.1% in July.

“Soft Medical Services suggests that the evidence for ever higher inflation in the PCE may be more limited,” said Andrew Hollenhorst, chief US economist at Citigroup in New York.


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