In May, the overall PPI in the United States saw the largest increase in over three years. Inflation rising, testing Powell's first interest rate decision.

With the soaring energy prices triggered by the Middle East conflict continuing to push up inflationary pressures, the US May PPI recorded the fastest growth in over three years. Data released by the US Bureau of Labor Statistics on Thursday showed that the US May PPI rose by 6.5% year-on-year, reaching the highest level since November 2022 and exceeding market expectations of 6.4%; the month-on-month increase was 1.1%, higher than the market expectation of 0.7%. However, the core PPI, which excludes food and energy, rose by 4.9% year-on-year, lower than the market expectation of 5.4%, and the month-on-month increase was 0.4%, lower than the market expectation of 0.5%. The report indicated that energy prices rose by 10.7% in May. Transportation and warehousing costs continued to rise, increasing by 2.6% in the month. Due to war-related fuel surcharges and the reduction in truck drivers caused by President Trump's crackdown on illegal immigration, truck freight rates continued to climb. Meanwhile, food prices rose by 0.6%, marking the largest increase in three months. Due to multiple factors such as adverse weather, war, and tariffs, the cost of grocery items continued to rise. The cost of fertilizer raw materials rose by 28% year-on-year. An indicator measuring early-stage inflation pressure in the production chain - the cost of intermediate demand processed goods excluding food and energy - also reached the highest level since 2021. Several components of the PPI are closely watched because these data will be included in the Federal Reserve's preferred inflation gauge - the Personal Consumption Expenditures (PCE) price index. Most categories showed strong performance. Portfolio management fees saw a significant rebound, marking the largest increase in nearly a year. Inpatient medical care and nursing home care costs also rose. However, a key airfare index saw its first decline since November last year. The Bureau of Economic Analysis (BEA) plans to release May PCE price data on June 25. The report also provided updated data on two other emerging sources of inflation - data centers and defense production. Prices of electronic components and parts saw their first decline in over a year since April, but still rose by nearly 27% compared to May 2025. In addition, prices related to government defense procurement rose by nearly 15% year-on-year. Data from the US Census Bureau last month showed that orders for capital goods related to defense surged to the historical second-highest level in April. Economists believe that replenishing military stocks depleted in the Middle East conflict may be one of the reasons driving the growth in orders. Additionally, despite the US Supreme Court overturning most of Trump's tariff measures in February this year, the Trump administration subsequently proposed new tariffs of at least 10% on imported goods from 60 trading partners. The market is also closely monitoring data on wholesale and retail trade service profit margins in the PPI report to assess the extent to which companies are passing on tariff-related costs to consumers. In May, this profit margin index saw the largest contraction in nearly a year. This report highlights the impact of the energy price shock caused by the closure of the Strait of Hormuz on the US economy. With no sign of a resolution to the conflict in the short term, as companies pass on higher energy and transportation costs to consumers, the prices of more goods and services are starting to rise. Data released on Wednesday showed that the US May CPI rose by 0.5% month-on-month and 4.2% year-on-year, meeting market expectations. The 4.2% year-on-year increase not only exceeded the 3.8% year-on-year increase in April but also marked the highest level since April 2023, indicating that the US inflation rate has returned to over 4% for the first time in three years. However, excluding the volatile prices of food and energy, the core CPI increased by 0.2% month-on-month and 2.9% year-on-year in May. The year-on-year increase in the core CPI matched market expectations, but the month-on-month increase was lower than the market's expectation of 0.3%, indicating that while underlying inflation pressures have rebounded, the rate of increase is lower than previously feared by the market. As the labor market remains resilient, the Federal Reserve is currently prioritizing curbing inflation. Both sets of inflation data released on Wednesday and Thursday indicated that rising energy costs are driving overall inflation higher, while core inflation remains relatively stable. These signs are expected to provide reasons for the Federal Reserve to maintain a wait-and-see approach, although the accelerated upward trend in overall inflation may further strengthen market expectations of a rate hike by the Federal Reserve in 2026. The Federal Reserve will announce its interest rate decision next week. This will also be the first interest rate decision announced by new Fed Chair Powell since taking office. The market widely expects that the Federal Reserve will stay put at that time. The CME Group's "FedWatch" tool indicates a 98.2% probability of the Federal Reserve keeping rates unchanged in June, with an 85.8% probability of maintaining rates in July as well. Some analysts have pointed out that the probability of a rate hike by the Federal Reserve in the short term is still low, and market concerns about Fed tightening are mainly at the expectation level. However, the market urgently needs to confirm Powell's hawkish or dovish stance. If he shows an extremely strong anti-inflation stance in the face of overheated data, the market will further bet on tightening. Therefore, Powell's statements and the policy signals he conveys will be more closely watched than the decision itself.