Inflation may stay elevated beyond people's expectations, according to economists.
What Happened: The Producer Price Index released Friday showed a higher-than-expected increase in June. The results surprised investors. Observers anticipate rate cuts on the horizon after a larger-than-expected drop in the monthly Consumer Price Index inflation gauge issued on Thursday.
On an annual basis compared to June 2023, the overall producer basket rose by 2.6%. It attained its highest point since March 2023.
"This morning's data is a reminder that inflation is still an issue and is likely to be with us for longer than most people expect," Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said on Friday.
The market should pay closer attention to the CPI than producer inflation, he said. That is what the Federal Reserve focuses on in determining whether it will cut the key interest rate, currently between 5.25% and 5.5%.
Also Read: June Producer Inflation Exceeds Forecasts, Restrains Investor Euphoria Following Consumer Price Relief
"The inflation data this week have been mixed," he said. "We are still optimistic about the economy and the market given the favorable price dynamics (largely slowing) and strong labor market, but if either of those trends change it will disproportionately affect markets because valuations have become stretched."
Producer price inflation and consumer price inflation are "a bit above levels the Fed would feel comfortable with," Bill Adams, chief economist for Comerica Incorporated (NYSE:CMA), said Friday.
"While the Fed looks poised to start cutting rates in September, they will do it in a much more gradual fashion than in the last couple rate cycles," he said.
A significant rise in trade services and retail rents drove the upside surprise and offset lower energy prices, he said.
The higher producer prices may limit downside pressure on consumer prices depending on firm's ability to pass on higher costs, Bank of America Corporation (NYSE:BAC) said on Friday.
But the higher PPI was "soft" on the Personal Consumption Expenditures (PCE) index due in large part to medical services, the bank said.
As a result, Bank of America said it expects the revised core PCE to rise by 0.17% m/m in June, down 4 basis points from its post-CPI estimate.
"On an annualized basis, this would be effectively in line with the Fed's 2% target and follow a very soft print in May," it said on Friday.
"In sum, disinflation has gotten back on track over the last two months."
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