U.S. May PPI hits 6.5%: Inflation pressures mount while core indicators soften

U. S. producer prices rose 6.5% year-on-year in May, the sharpest increase since November 2022 and above the 6.4% consensus. The index climbed 1.1% month-on-month, well ahead of the 0.7% forecast and matching April’s revised reading. Two consecutive monthly gains above 1% mark the strongest two-month stretch since March 2022.

Energy drives the headline surge

Energy costs are the key driver behind the stronger-than-expected PPI print. Overall energy prices rose 10.7% year-on-year, while wholesale gasoline jumped 23% month-on-month and nearly 70% annually.

Disruptions at the Strait of Hormuz have pushed energy costs higher, and these cost pressures are filtering through the supply chain. Businesses are increasingly passing elevated energy and transportation expenses onto end customers.

Transport and warehousing costs also rose markedly, up 2.6% month-on-month, extending an upward trend seen since the start of recent geopolitical tensions.

Core PPI eases, squeezing corporate margins

While headline inflation accelerated, core metrics painted a more subdued picture. Core PPI (excluding food and energy) came in at 4.9% year-on-year and 0.4% month-on-year, both below market expectations of 5.4% and 0.5% respectively. This trend mirrors Wednesday’s CPI data, where core consumer prices rose just 0.2% month-on-month.

A widening gap between producer and consumer price growth is a key concern. With factory-side costs rising faster than retail prices, firms have less scope to raise prices, putting downward pressure on profit margins. Margins within wholesale and retail trade services also contracted at the sharpest pace in almost a year.

Inflation data lifts rate hike expectations

May’s headline CPI stood at 4.2% year-on-year, a three-year high, with gasoline prices climbing 40.5% annually. Despite softer core inflation, real household spending power has weakened, as wage growth fails to keep pace with rising prices, according to economists at Comerica Bank.

The latest PPI figures have nudged market expectations for interest rate hikes higher. Markets now price in around one full rate rise for 2026. Even so, the probability of the Federal Reserve holding rates steady at its June meeting remains at 98.2%, meaning near-term tightening is highly unlikely.

Analysts at CICC retain their baseline view of no rate cuts or hikes for the full year, noting current inflation is largely fuelled by temporary energy shocks rather than broad cyclical pressures.

FOMC preview: Warsh’s debut to set policy tone

Next week’s Federal Open Market Committee (FOMC) meeting will be the first policy decision led by new Fed Chair Kevin Warsh. While markets widely expect interest rates to stay unchanged, investors are focused on identifying his policy stance.

CICC forecasts Warsh will prioritise rebuilding policy credibility. He is more likely to signal tighter quantitative tightening rather than hint at rate hikes, pointing to a scenario where balance sheet reduction takes precedence over delayed rate cuts.

Should disruptions at the Strait of Hormuz persist, elevated energy costs will continue to feed into broader goods and services inflation. This would build further price pressures and leave the Federal Reserve with far less room to manoeuvre on policy.