# Strained supply chains keep U.S. producer prices hot
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2021-09-10
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: U.S. producer prices surge in August, biggest 11-year gain
Meta Description: U.S. producer prices rose in August, leading to highest annual gain in 11 years. Supply chain bottlenecks, high demand to keep inflation elevated.
URL: https://financedigest.com/strained-supply-chains-keep-u-s-producer-prices-hothtml

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By Lucia Mutikani

WASHINGTON (Reuters) – U.S. producer prices increased solidly in August, leading to the biggest annual gain in nearly 11 years, suggesting that high inflation is likely to persist for a while as the unrelenting COVID-19 pandemic continues to pressure [supply chains](https://www.financedigest.com/minimising-supply-chain-cyber-risks-by-asking-the-right-questions.html "MINIMISING SUPPLY CHAIN CYBER RISKS BY ASKING THE RIGHT QUESTIONS").

Strong demand and [supply constraints were underscored by other data](https://www.financedigest.com/in-the-supply-chain-clean-data-is-the-fuel-of-the-future.html "In the supply chain, clean data is the fuel of the future") on Friday showing the pace of inventory accumulation at wholesalers slowed in July. It is now taking wholesalers the fewest months in seven years to clear shelves.

[“Supply chain](https://www.financedigest.com/5-steps-to-successful-supply-chain-finance.html "5 Steps to successful supply chain finance") bottlenecks have persisted longer and more intensely than most predicted at the beginning of this year, and widespread labor shortages are among the main input issues producers are dealing with,” said Will Compernolle, a senior economist at FHN Financial in New York. This means consumer [price inflation](https://www.financedigest.com/oil-prices-dip-on-u-s-crude-reserve-release-inflation-pressure.html "Oil prices dip on U.S. crude reserve release, inflation pressure") should remain elevated for a while.

The producer [price index for final demand rose 0.7% last month after two straight monthly increases](https://www.financedigest.com/syngenta-4q-profit-falls-as-raw-material-prices-increase.html "Syngenta 4Q profit falls as raw material prices increase") of 1.0%, the Labor Department said. The gain was led by a 0.7% advance in services following a 1.1% jump in July.

A 1.5% increase in trade services, which measure [changes in margins](https://www.financedigest.com/explainer-oil-price-surge-changes-ecb-narrative-only-at-the-margins.html "Explainer-Oil price surge changes ECB narrative only at the margins") received by wholesalers and retailers, accounted for two-thirds of the broad rise in services. Goods [prices jumped](https://www.financedigest.com/stocks-jump-as-treasury-yields-ease-and-oil-prices-sell-off.html "Stocks jump as Treasury yields ease and oil prices sell off") 1.0% after climbing 0.6% in July, with food rebounding 2.9%.

Transportation and warehousing prices shot up 2.8%.

The latest global wave of COVID-19 infections, driven by the Delta variant of the coronavirus, has disrupted production at factories in Southeast Asia, [key raw materials suppliers for manufactures in the United States](https://www.financedigest.com/inflation-in-key-german-states-eases-for-second-month.html "Inflation in key German states eases for second month"). Congestion at Chinese ports is also adding to the pressure on U.S. [supply chains](https://www.financedigest.com/2023-supply-chain-trends-for-businesses-to-ensure-a-more-efficient-supply-chain-strategy.html "2023 supply chain trends for businesses to ensure a more efficient supply chain strategy").

In the 12 months through August, the PPI accelerated 8.3%, the [biggest year-on-year advance since November 2010 when the series was revamped](https://www.financedigest.com/exclusive-volvo-readies-ev-blitz-in-biggest-product-revamp-under-geely.html "Exclusive: Volvo readies EV blitz in biggest product revamp under Geely"), after surging 7.8% in July.

Economists [polled by Reuters](https://www.financedigest.com/germany-home-prices-to-sink-nearly-6-this-year-reuters-poll.html "Germany home prices to sink nearly 6% this year – Reuters Poll") had forecast the PPI gaining 0.6% on a monthly basis and rising 8.2% year-on-year.

[Stocks on Wall Street](https://www.financedigest.com/asian-stocks-edge-up-before-u-s-jobs-data-defying-wall-street-selloff.html "Asian stocks edge up before U.S. jobs data, defying Wall Street selloff") were lower. The [dollar was steady](https://www.financedigest.com/shares-steady-dollar-gains-ahead-of-u-s-inflation-data.html "Shares steady, dollar gains ahead of U.S. inflation data") against a basket of currencies. U.S. Treasury prices fell.

LOGISTICS DELAYS

Though surveys from the Institute for Supply Management this [month showed measures of prices paid by manufacturers](https://www.financedigest.com/spanish-manufacturing-output-down-for-6th-straight-month-in-dec-pmi.html "Spanish manufacturing output down for 6th straight month in Dec -PMI") and services industries fell significantly in August, they remained elevated. Factories and [services providers](https://www.financedigest.com/red-box-and-bloomberg-partner-to-provide-comprehensive-record-keeping-and-trade-reconstruction-services-for-financial-compliance.html "Red Box and Bloomberg Partner to Provide Comprehensive Record Keeping and Trade Reconstruction Services for Financial Compliance") still struggled to secure labor and raw materials, and faced logistics delays.

This was corroborated by the Federal Reserve’s Beige Book report on Wednesday compiled from information collected on or before Aug. 30 showing “contacts reported generally higher input prices but, as with labor, they were mostly [concerned about getting the supplies they needed versus the price.”](https://www.financedigest.com/shares-fall-with-oil-prices-amid-concerns-about-u-s-fed-rate-hikes.html "Shares fall with oil prices amid concerns about U.S. Fed rate hikes")

The supply bottlenecks are making it harder for [businesses to restock after running down inventories in the first half of the year](https://www.financedigest.com/novartis-to-spin-off-generics-business-sandoz-next-year.html "Novartis to spin off generics business Sandoz next year"). In a separate report on Friday, the [Commerce Department said wholesale](https://www.financedigest.com/digitalizing-b2b-commerce-wholesale-will-never-be-the-same-again.html "Digitalizing B2B Commerce – Wholesale Will Never Be the Same Again ") inventories rose 0.6% in July after surging 1.2% in June. Sales increased 2.0%. At July’s sales pace it would take wholesalers 1.20 months to clear shelves, the fewest since July 2014, from 1.22 in June.

“Producers are struggling to replenish their stockpiles against surging demand,” said Matt Colyar, an economist at Moody’s Analytics in West Chester, Pennsylvania.

With inventories tight, producers are easily passing on the higher costs to consumers. Federal Reserve Chair Jerome [Powell has steadfastly maintained that high inflation](https://www.financedigest.com/asian-shares-slump-as-powell-warns-on-inflation.html "Asian shares slump as Powell warns on inflation") is transitory.

Though most economists share this view, some [argue that strong wage growth from a tightening labor market](https://www.financedigest.com/video-marketing-why-you-cannot-argue-with-the-statistics.html "‘Video Marketing: Why you Cannot Argue with the Statistics’") suggests inflation could be more persistent.

Today’s [data on wholesale prices should be eye-opening for the Fed](https://www.financedigest.com/dollar-buoyant-as-robust-u-s-data-keep-fed-hawks-in-control.html "Dollar buoyant as robust U.S. data keep Fed hawks in control"), as inflation pressures still don’t appear to be easing and will likely continue to be felt by the consumer in the coming months,” said Charlie Ripley, senior investment strategist at Allianz Investment Management.

The Fed’s preferred [inflation measure for its flexible 2% target](https://www.financedigest.com/the-mouse-that-roared-new-zealand-and-the-worlds-2-inflation-target.html "The mouse that roared: New Zealand and the world’s 2% inflation target"), the core personal consumption expenditures price index, increased 3.6% in the 12 months through July after a similar gain in June. Data next week will likely show the [consumer price](https://www.financedigest.com/france-leans-on-retailers-to-help-consumers-cope-with-food-prices.html "France leans on retailers to help consumers cope with food prices") index rising 0.4% in August and increasing 5.3% on a year-on-year basis, according to a Reuters survey.

High inflation and supply constraints, which tanked motor vehicle sales in August, have [prompted economists to slash their third-quarter gross domestic product growth estimates to as low as a 3.5% annualized rate](https://www.financedigest.com/rate-rise-fears-prompt-third-week-of-global-equity-funds-outflows.html "Rate rise fears prompt third week of global equity funds outflows") from as high as 8.25%. The [economy grew](https://www.financedigest.com/turkeys-economy-grew-7-6-in-q2-driven-by-domestic-demand-exports.html "Turkey’s economy grew 7.6% in Q2 driven by domestic demand, exports") at a 6.6% rate in the second quarter.

The danger with [inflation is once prices](https://www.financedigest.com/uk-shop-price-inflation-hits-record-8-in-january-brc.html "UK shop price inflation hits record 8% in January: BRC") go up, they don’t go back down and the economy and producers and consumers all have to live in a costlier world where many don’t have the means to do more than just barely survive,” said Chris Rupkey, chief economist at FWDBONDS in New York.

There are, however, signs that inflation is likely nearing its peak. Excluding the volatile food, energy and trade services components, producer prices rose 0.3%, the smallest [gain since](https://www.financedigest.com/dollar-heads-for-first-weekly-gain-since-february.html "Dollar heads for first weekly gain since February") last November. The so-called core PPI shot up 0.9% in July.

In the 12 [months through August](https://www.financedigest.com/august-the-most-popular-month-to-start-a-holiday-home-search-reveals-portal.html "AUGUST THE MOST POPULAR MONTH TO START A HOLIDAY HOME SEARCH REVEALS PORTAL"), the core PPI accelerated 6.3%. That was the largest [rise since the government introduced the series in August](https://www.financedigest.com/uk-car-output-rises-in-august-soaring-costs-cast-shadow-over-recovery.html "UK car output rises in August, soaring costs cast shadow over recovery") 2014 and followed a 6.1% increase in July.

Details of the PPI components, which feed into the core PCE price index, were mixed. Healthcare costs fell 0.2%. Portfolio management fees rose 1.1% and airline tickets increased 8.9% after soaring 9.1% in July.

Soft medical services suggest that evidence of persistently [stronger inflation](https://www.financedigest.com/dollar-stronger-as-inflation-worries-dampen-risk-sentiment.html "Dollar stronger as inflation worries dampen risk sentiment") in PCE may be more limited,” said Andrew Hollenhorst, chief U.S. economist at Citigroup in New York.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)


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