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US PPI surged at record pace in July
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Rising concerns about supply chains amid China’s new restrictions
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The spread between CPI and PPI is growing
US PPI inflation data for July, which was released earlier today, was long-awaited by the markets. The report showed that producer prices exploded at record pace. The headline print rose 7.8% YoY or 1.0% MoM (vs exp. 7.3% YoY and 0.6% MoM). The core gauge topped estimates as well - core PPI advanced 6.2% YoY or 1.0% MoM (vs exp. 5.6% YoY and 0.5% MoM). The annual gain in the headline figure was the largest on record (the series dates back to 2010).
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Transportation and warehousing costs increased the most in July - by as much as 2.7% MoM. On the other hand, food costs fell by 2.1% MoM. Source: US Bureau of Labor Statistics
What does the report tell us then? It shows that the global economy is facing some specific challenges, particularly relating to supply chains. Transportation costs are running hot and the situation does not seem likely to improve given recent Covid-19 developments. China’s new restrictions should make markets concerned in particular. Just today Chinese authorities decided to partially shut down the world’s third-busiest container port after a worker became infected with Covid, threatening more damage to already fragile supply chains and global trade as a key shopping season nears. Meanwhile, container shipping rates have already skyrocketed in recent months (see the chart below).
Source: Bloomberg via ZeroHedge
As some pointed out, companies’ margins are expected to rise under such circumstances. From the consumers’ perspective, it may herald higher prices as the gap between PPI and CPI is growing and companies may want to pass on costs to customers. Therefore, markets will surely pay attention to China’s steps amid spreading Delta variant as well as incoming PPI prints - both will likely have a tremendous impact on CPI figures worldwide.
The spread between PPI and CPI starts to grow rapidly. Source: Bloomberg via ZeroHedge
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