Deflation Pushes Producer Prices To 28-Month Lows Ahead Of Fed's Interest Rate Decision

U.S. producers now face the reality of deflation, as the Producer Price Index (PPI) for final demand slumped 0.3% month-on-month in May, down from the previous 0.2% monthly increase and below the expected 0.1% fall, the U.S. Bureau of Labor Statistics reported Wednesday.

The PPI print follows the May consumer price index (CPI) reading, which came in lower than expected, supporting market belief that the Fed is nearing the end of its interest rate hike cycle.

The market focus is now on the upcoming interest rate decision by the Federal Reserve, scheduled for 2 p.m. ET Wednesday, followed by the press conference with Chair Jerome Powell at 2:30 p.m. Investors are almost fully anticipating a pause in the Fed’s hike cycle, but their attention will be on whether this is regarded as a permanent halt or simply a skip.

Producer Inflation Drops In April: 5 Things You Need To Know 

• Headline PPI inflation fell 0.3% from a month ago. In annual terms, producer prices came in 1.1% higher from a year ago, falling short of the expected 1.5%. This marks the lowest producer inflation rate since December 2020. 
  
• Core PPI inflation, which excludes foods and energy, ticked 0.2% higher on the month, in line with both the reading in April and expectations. In annual terms, the core PPI was 2.8% higher, slightly lower than the expected 2.9% and down from 3.2% in April.
  
• Most of the May decline is attributable to the index for final demand energy, which dropped 6.8%.
  
• Transportation and warehousing fell 1.4% on the month, marking the fifth straight negative monthly reading, certifying a freight recession.

• Sixty percent of the May decline in the PPI for final demand goods can be attributed to a 13.8% drop in gasoline prices.

Market Reactions

Treasury yields moved lower, with the 10-year yield down by 2 basis points to 3.8% and the two-year yield down 4 basis points to 4.63%.

The dollar, as closely tracked by the Invesco DB USD Index Bullish Fund ETF UUP, extended losses for the session, falling 0.3% on the day.

Futures contracts on the S&P 500 index, which is tracked by the SPDR S&P 500 ETF Trust SPY were mostly flat ahead of the opening bell on Wall Street. 

Read now: Stock Futures Mixed Heading Into Fed Decision Day; Analyst Says Economy’s Resilience Surprising

Photo via Shutterstock.