High oil prices impacted producers in industries that depend on oil for producing output, including manufacturing, transportation and construction.
Record increases in U.S. producer prices this year, a key factor behind skyrocketing consumer price rises, are already starting to fade and will likely slow even further in 2023.
S&P Global Market Intelligence forecasts the producer price index for final demand finished goods, which measures the average price businesses pay for goods they sell to customers, will grow 13.9% year over year in the third quarter, the second-fastest growth since the start of 2021. Still, that is slower than 17% in the second quarter, and Market Intelligence expects the figure to slow even more in subsequent quarters before turning slightly negative by the end of 2023.
The continued effects of the COVID-19 pandemic, related supply-chain issues and the Russia-Ukraine war have complicated how easily producers receive goods. Surging costs for energy and other materials businesses use for their products are also forcing many companies to pay more and pass on costs to customers. Consumers, meanwhile, turned their money toward goods during the height of the pandemic as services were restricted or shut down, which pushed demand to levels that suppliers could not meet.
Those factors pushed consumer inflation to 40-highs this year, pressuring the Federal Reserve to aggressively raise interest rates to curb demand and bring down price pressures. Some of those stressors are starting to fade, particularly as energy costs retreat from their recent highs. And as virus fears fade and consumers are spending more money on services such as travel and dining, the pressure on goods producers is easing up, though not disappearing entirely.
"I'm not saying prices are going to go down, but the rate of increase is going to slow perceptively over the next six months," said John Mothersole, director of research, pricing and purchasing at S&P Global Market Intelligence.
What pushed producer prices higher
Supply-chain bottlenecks are a larger factor driving producer prices higher, said Joann Weiner, an associate professor of economics and director of the applied economics graduate program at George Washington University.
The energy sector was the biggest driving factor for July's producer price index for final demand, with a 36.8% year-over-year increase despite falling 9% from June. Construction, transportation and warehousing services, and food registered the next highest increases. High oil prices impacted producers in industries that depend on oil for producing output, including manufacturing, transportation and construction, said Kurt Rankin, senior economist with PNC Financial Services Group. Getting products to market requires transportation, adding another layer of cost.
The recent drop in oil prices will help, but it takes a few months to filter through the supply chain system, Rankin said. Front-month West Texas Intermediate crude oil futures have dropped from their 2022 highs of about $120 per barrel to below $90 in early September.
In the food category, the initial months of the pandemic caused consumers to stop eating at restaurants, and schools sent students home, both of which created an institutional fall in demand for providing food in restaurants and at schools, George Washington University's Weiner said. Meat-producing plants also shut down during the height of the pandemic, causing supply problems.
The producer price index and consumer price index, the market's preferred inflation gauge, have risen together since the start of the pandemic in March 2020. The consumer price index for all items rose 8.5%, before seasonal adjustment, year over year in July, the most recent month for which data is available. This fell from June's 9.1% year-over-year rise, which was the biggest annual increase since 1981. Consumer and producer price data for August will be released Sept. 13 and 14, respectively.
Demand petering out
The pandemic created shocks on both the supply and demand sides of the market, Mothersole said. Service industries were suppressed by closures and as a result, stimulus payments were channeled into spending on goods.
"Goods-producing industries were simply overwhelmed with the surge in demand," Mothersole said.
As pandemic-related restrictions and mandates peter out, consumers are spending money on travel, hospitality and other services they could not partake in during 2020 and most of 2021. This pent-up demand, however, will exhaust itself, PNC's Rankin said.
Inflation will slow as that demand unwinds, consumers slow their spending and interest rates rise.
"That's going to relieve some pressure on prices," Rankin said.