Rising Energy Costs Impact U.S. Business Prices

In May, the costs of goods and services for U.S. businesses surged at the fastest annual rate seen in more than three years, largely due to rising energy prices.

The Labor Department revealed that the producer price index (PPI) for final demand jumped by 1.1% from April to May, matching the increase seen in April and a rise from 0.7% in March. Year-over-year, the index rose by 6.5%, marking its steepest annual growth since November 2022.

Economists had anticipated a month-on-month increase of 0.7% and an annual rise of 6.4%. Interestingly, the previous month’s increase was adjusted down by 0.3 percentage points from an earlier estimate of 1.4%.

About 57% of this overall increase can be attributed to escalating energy prices. Core producer prices, which omit food and energy, experienced a rise of 0.4% in May. Over the past year, these core prices have advanced by 4.9%.

Across consumer goods, prices increased by 3.5% in May, a significant 11% jump compared to the same time last year. When excluding energy, the rise was more modest at 0.3%, or an annual increase of 2.9%.

The Producer Price Index gauges the prices received by U.S. businesses selling to consumers, other businesses, and government entities, encompassing a broader audience than the Consumer Price Index (CPI). The figures reflect sales to end users rather than contributions to other goods or services. Import prices are not included since they aren’t paid to U.S. producers, however, export prices, which are excluded from the CPI, are included.

In May, energy prices saw a significant rise of 10.7%, driven largely by a staggering 23.4% increase in gasoline costs. Prices for entities like diesel fuel, jet fuel, plastic materials, industrial chemicals, and liquid natural gas also went up, although household electricity prices saw a decline.

The final demand prices overall jumped by 2.8% in May, marking the highest increase recorded since December 2009. A whopping 80% of this increase stemmed from higher energy prices, with food prices also witnessing a modest rise of 0.6%. Core goods, excluding food and energy, rose by 0.8%.

Inflation in services appears to be easing, with the final demand service index rising by only 0.3% in May, following an increase of 0.7% in April. Specifically, the index for transportation and warehousing services surged by 2.6%, likely driven by surcharges tied to fuel price hikes. More than 40% of the services index’s increase came from a rise in portfolio management, which tends to align closely with stock performance.

The PPI also tracks wholesaler and retailer margins within the “trade services” category, measuring the gap between what a wholesaler or retailer pays for a product and its subsequent selling price, categorized as the seller’s service price. Margins in trade and services contracted by 1.1% in May, nearly negating the 1.3% expansion seen in April.

For the final demand index—excluding food, energy, and trade services—a 0.8% rise in May represents the highest increase since March 2022, when it rose by 0.9%. The “supercore” index experienced a 5.1% increase year-over-year, its largest gain since the 5.5% rise in October 2022.

The PPI also includes “intermediate demand,” which concerns the prices of goods and services utilized in producing end-demand products (minus capital investments). The index for processed goods in intermediate demand skyrocketed by 3.5%, marking its largest increase since 2021. Over 60% of May’s rise can be linked to a 10.4% jump in processed energy product prices, with diesel prices alone accounting for about a quarter of the total increase. Prices for food and feed saw a rise of 0.7%, while processed goods prices, excluding food and energy, increased by 1.8%.

Meanwhile, unprocessed product prices climbed by 4.9%, primarily influenced by crude oil prices. Prices for intermediate demand services grew by 0.5%, mainly due to rising investment service prices tied to stock gains. However, the wholesale profit margin for machinery equipment parts and supplies decreased by 1.2%.

Interestingly, certain categories related to expanding AI capabilities and building data centers have observed activity. Prices for communications and similar equipment increased by 0.2%, rising 11.9% compared to last year. Meanwhile, transformer and power regulator prices rose by 0.4% year over year. Although electronic component prices fell by 0.6% this month, they had previously surged by 8% and are up by 26.9% compared to last year. For intermediate demand, prices for electronic components saw a similar decline but still reflect an annual rise of 26.9%. Switchboard and control equipment prices for intermediate demand rose by 0.6% in May, up 10.8% from the previous year.

Prices for goods and services bought by the government rose by 2% in May, following a 2.1% increase in April, with an overall annual increase of 10.6%. Defense spending notably impacted this, contributing to a 2.6% rise in May and a striking 14.7% for the year.

Although often labeled as a wholesale price index in the media, only a minor fraction pertains to wholesale trade. In fact, it hasn’t officially been referred to as the Wholesale Price Index since 1978, which, according to the Department of Labor, was a bit of a misnomer even back then.