The May PPI data helps squash concerns that the Federal Reserve's inflation battle has stalled. However, the report does contain evidence of wholesalers passing along some the cost of the higher tariff rates imposed in April.

There was a 0.4 percent increase in the margins for final demand trade services, and it jumped 4.1 percent compared to a year ago. Wholesalers and retailers ate the cost of higher tariffs in April, but May's data shows they absorbed less last month and passed on more of the cost in the form of higher prices.

U.S. wholesale price inflation as measured by the Producer Price Index for final demand rose less than expected up 0.1 percent in May, following a 0.2 percent decline in April, and just below expectations for a 0.2 percent rise in the Econoday survey of forecasters. Final demand prices dipped 0.1 percent in March and saw a 0.1 percent uptick in February.

Compared to May 2024, final demand PPI rose 2.6 percent, compared to a 2.4 percent increase for the 12 months ended in March.

There was a 0.2 percent increase in prices for final demand goods following a 0.1 percent rise in April. Prices for final demand services rebounded by 0.1 percent, after a 0.4 percent drop in April.

Food prices rose 0.1 percent after a 0.9 percent decrease in April, and are 3.5 percent higher compared to May 2024. Energy prices were flat in May after a 0.1 percent uptick in April and are 4.4 percent lower when compared to May 2024 (after prices fell 8.1 percent on an annual basis in April).

May final demand prices excluding food and energy fell 0.4 percent, following a 0.4 percent rise in March, and are up 3.1 percent from a year ago after a 3.3 percent rise in March.

Final demand prices excluding foods, energy, and trade services saw a 0.1 percent rise in May, following a 0.2 percent decline in April, and +0.3 percent in March. For the 12 months ended in May, prices for final demand less foods, energy, and trade services rose 3.0 percent, compared to a 2.9 percent rise on an annual basis in April.

The consensus sees PPI-FD up 0.2 percent on month in May and up 2.6 percent on year after a decrease of 0.5 percent on month and an increase of 2.4 percent on year in April.

The Producer Price Index (PPI) of the Bureau of Labor Statistics (BLS) is a family of indexes that measures the average change over time in the prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller. Effective with the January 2014 PPI data release in February 2014, BLS transitioned from the Stage of Processing (SOP) to the Final Demand-Intermediate Demand (FD-ID) aggregation system. The headline PPI (for Final Demand) measures price changes for goods, services, and construction sold to final demand: personal consumption, capital investment, government purchases, and exports.

The PPI measures prices at the producer level before they are passed along to final consumers. A portion of the inflation at the producer level gets passed through to the consumer price index (CPI). By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in coming months.

While the CPI is the price index with the most impact in setting interest rates, the PPI provides significant information earlier in the production process. As a starting point, interest rates have an"inflation premium" and components for risk factors. A lender will want the money paid back from a loan to at least have the same purchasing power as when loaned. The interest rate at a minimum equals the inflation rate to maintain purchasing power and this generally is based on the CPI. Changes in inflation lead to changes in interest rates and, in turn, in equity prices.

The PPI comes in two key main versions: final demand (FD) and intermediate demand (ID). The final demand portion is composed of six main price indexes: final demand goods; final demand trade services; final demand transportation and warehousing services; final demand services less trade, transportation, and warehousing; final demand construction; and overall final demand.

The intermediate demand portion of the FD-ID system tracks price changes for goods, services, and construction products sold to businesses as inputs to production, excluding capital investment. There are two parallel treatments of intermediate demand, each constructed from the identical set of commodity price indexes. The first treatment organizes commodities according to commodity type, and the second organizes commodities using a stage-based, production flow model.

The PPI is considered a precursor of both consumer price inflation and profits. If the prices paid to producers increase, businesses are faced with either charging higher prices or taking a cut in profits. The ability to pass along price increases depends on the strength and competitiveness of the marketplace.

Under the prior PPI system, the producer price index was substantially more volatile than the consumer price index because the CPI included services while the PPI did not. Volatility has been reduced substantially in the PPI-FD due to the inclusion of services but the PPI still is more volatile than the CPI. Wages are a bigger share of the costs at the retail level than at the producer level and this plays a role in the CPI’s lower volatility. Also, the PPI does not include owners’ equivalent rent—a large and slow moving component in the CPI. Food and energy prices are major sources of volatility in the PPI, hence, the greater focus on the"core PPI" which excludes these two components.

The bond market rallies when the PPI decreases or posts only small increases, but bond prices fall when the PPI posts larger-than-expected gains. The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.