• Final Demand Producer Price Index (PPI) declined outright in May 2023
• Core PPI, less Food & Energy, was up in May 2023 but is near the Fed’s overall goal of 2%
• Goods price declines led overall prices lower for the month while Services PPI rose only modestly
• Energy prices for producers, along with resulting transportation costs, show no signs of pressuring inflation higher this year

The Producer Price Index (PPI) for May 2023 fell versus the month prior, declining by 0.3% versus April. This translates to a 1.2% year-over-year gain, which is the weakest hike in producers’ costs since the U.S. economy was still at an imposed standstill in late 2020 (0.8%, December 2020). May 2023’s PPI decline is the fourth monthly fall in the Final Demand index over the past six months, going back to the closing month of 2022. Producer input costs appear to have been fully tamed and should not pose pass-through cost issues for the Federal Reserve as it continues its efforts to extinguishing consumer price inflation in the coming months. 

The -6.8% monthly decline in producers’ Energy prices in May 2023 puts this PPI component index at 17.7% below year-ago levels. Energy price concerns resulting from OPEC talk & action are being offset by slower-than-anticipated economic activity in China. And although the U.S. travel season for 2023 is just underway, there is little sign that energy prices are headed for a sharp climb in the coming months. This trend should keep manufacturers’ input costs contained and alleviate any compounding inflationary pressures from the cost of transporting goods to the market. In fact, the Transportation & Warehousing Final Demand component of PPI fell for a fifth consecutive month in May 2023, declining by 1.4% (-6.8% year-over-year). 

Core PPI, which excludes food and energy components, was up modestly in May 2023. But the 0.2% rise in the Core PPI measure still translates only to a 2.8% year-over-year gain. This is well within a range supportive of the Fed’s average 2% inflation target for consumer price inflation. With producers of both goods (-1.6% in May 2023) and services (+0.2% in May 2023) experiencing consistently tame cost increases themselves, the urgency of passing costs on to consumers through higher prices has diminished dramatically. Businesses may still use unyielding consumer demand as support for price hikes, which will keep inflation from falling more rapidly through the remainder of this year. But recent months’ PPI results suggest that the supply side of the inflation equation has been all but solved for producers. 

May 2023’s PPI report reinforces the line of thinking that inflation can be brought back in line with policymakers’ goals, but only by undermining consumer demand. The reversal in producer cost trends from an annualized PPI gain in the 5% range in January to outright declines in three of the past four months comes from declining energy and materials costs for producers. Wage growth remains a pressure for businesses but that, too, is slowly moving toward normalization. PNC continues to forecast a mild recession in the U.S. economy starting late in 2023, with consumer spending ultimately catching up with household budgets at the same time as businesses respond to higher borrowing costs. If consumers do pull back on spending and therefore undercut all pretense for price increases on store shelves, businesses both upstream and downstream in the economy should not feel a sharp bite since recent PPI trends show their own cost pressures easing in all directions.

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