Wholesale inflation in May hit highest level since November 2022 on soaring energy costs

• The PPI increased 6.5% annually and 1.1% monthly in May, surpassing the expected 0.7% gain, with 80% of the rise in goods prices stemming from a 10.7% surge in energy prices
• Gasoline prices soared 23.4% while diesel, jet fuel, and natural gas prices also jumped significantly due to ongoing Iran war-related supply disruptions
• Odds of a Fed rate hike in July rose above 12% following the report, though most traders expect rates to remain steady at the upcoming meeting

Wholesale Inflation Summary

Key Data Points:

• The Producer Price Index (PPI) surged 6.5% year-over-year in May, the highest level since November 2022
• Monthly PPI jumped 1.1%, exceeding expectations of 0.7% and matching April's increase
• Core PPI (excluding food and energy) rose 0.4% monthly, below the 0.5% forecast
• Gasoline prices soared 23.4% in May alone
• Energy prices overall surged 10.7%, accounting for 80% of the final demand goods price increase

Market Drivers:

The inflation spike is primarily attributed to soaring energy costs related to the Iran war and blockaded trade routes. Diesel, jet fuel, plastic resins, industrial chemicals, and natural gas liquids all experienced significant price increases. Portfolio management fees also contributed, rising 4.8% amid record-high stock markets.

Federal Reserve Implications:

While traders expect the Fed to hold rates steady at next week's meeting, the probability of a July rate hike jumped above 12% following the report. Analysts view the elevated PPI as another indicator that could pressure the Fed toward tightening, though some believe the inflationary spike may be temporary once the Iran conflict resolves.

Additional Context:

The Consumer Price Index also showed inflation increases in May. The European Central Bank responded to surging inflation by raising interest rates to 2.25% from 2%, marking the first major central bank to hike rates in this cycle.

President Trump defended the inflation numbers, suggesting they could have been worse given the ongoing conflict and predicting improvement once the war ends.