MARKET TRENDS: Prices and Production Tops Estimates, Index Surges Higher

Producer prices in the U.S. grew for the second straight month in June. The rise in prices was higher than anticipated, with a rising cost of gasoline and a range of other goods. This indicates a diminishing oil-driven downtrend in prices. Signs of firming inflation support views that the Federal Reserve will raise interest rates later this year.

The Producer Price Index (PPI) for final demand edged up 0.4% in June following a rise of 0.5% in May, the Labor Department said on Wednesday. The rise in PPI was better than the market expectations of 0.2%, but lower than the 0.9% increase a year ago.

Over 60% of the increase in the PPI was driven by a 0.7% increase in goods prices last month, while the volatile trade services component, which mostly reflects profit margins at retailers and wholesalers, rose 0.2% in June after increasing 0.6% in the prior month. In the 12 months through June, the PPI fell 0.7%, after declining 1.1% in May, registering the fifth straight 12-month decrease in the index.

Excluding food and energy, Core PPI, a key measure of producer price pressure, rose 0.3% in June. This was above the market estimates of 0.1%, and a similar 0.1% rise in May.

Last month, gasoline prices increased 4.3% after surging 17% in May. Food prices rose 0.6% in June following a 0.8% increase in the prior month. Wholesale egg prices soared a record 84.5% last month, after surging 56.4% in May, due to an outbreak of bird flu. Due to this, food prices overall were pressured.

Producer prices were impacted by plunging crude oil prices and a stronger dollar. This led to lower producer inflation and dampened overall domestic price pressures. Inflation seems to be stabilizing with a rise in oil prices; however a stronger dollar could potentially slow the increase in prices. Earlier on Tuesday, it was reported that import prices fell in June, attributed to an 11.6% appreciation in the U.S. dollar against the currencies of the U.S.’s main trading partners since June 2014.

Industrial production in June increased for the first time since November, a sign that the economy is improving. Industrial production, a total of the production in the manufacturing, utilities, and mining sectors, rose a seasonally adjusted 0.3% from May, the Federal Reserve said on Wednesday.

The increase in production reversed a 0.2% decline in May, and was better than market estimates of a 0.2% rise. However, for the second quarter, industrial output dropped at an annual rate of 1.4%.

An increase in mining and utility output drove the rise in overall industrial production. The manufacturing output, the largest component of the index, remained flat as the output of motor vehicles and parts dropped 3.7%. This was partially offset by a 0.3% increase in other durable goods and consumer energy products.

The market expected manufacturing output to increase by 1% after having declined 0.2% in May. Mining output jumped 1% in June after a 2.1% decline in May, which was also its fifth straight fall. Utility production increased 1.5%, following a 1.2% rise in May.

Factory activities have struggled this year, hit partly by harsh winter weather in January and February, a strong dollar, and weak overseas economies. The dollar has increased about 11.6% percent against a basket of overseas currencies in the past 12 months, which makes U.S. goods more expensive in overseas markets.

Falling oil prices forced refiners to cut petroleum production, which weighed on factory output. Oil drillers have also slashed their purchases of steel pipe and other equipment. However, manufacturers are coping and slowly boosting output. This was well reflected in the NY Empire State Manufacturing Index that came in at 3.86 in July, beating expectations of 3 points and the previous month’s decline of 1.98.

Manufacturing could contribute to a stronger economy this year. Total Capacity Utilization, which measures industrial slack, rose 0.2% to 78.4%, slightly above market expectations of 78.1%. On a yearly basis, capacity utilization grew 2.6% but was below its average since 1972 by 1.7%.

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