U.S. Supplier Price Gains Accelerated in May

Producer prices had moderated somewhat in April, after the March gain had been the highest since records began in 2010, pushed up by surging energy prices after Russia invaded Ukraine.

The so-called core price index—which excludes the often-volatile categories of food, energy and supplier margins—rose 0.5% after a 0.4% gain the prior month.

On an annualized basis, the PPI rose 10.8% in May from a year ago, down slightly from a revised 10.9% in April. May marked the sixth consecutive month of double-digit annual gains for producer prices.

Economists are watching producer and consumer price indexes closely for signs that inflation could be peaking. With the annual increase in consumer prices ticking back up in May to 8.6%, Federal Reserve officials are contemplating a larger-than-expected 0.75-percentage-point interest rate increase at their meeting this week. Continued pressure on producer prices often signals future rises in consumer inflation as costs pass through supply chains.

Elevated producer prices suggest that consumer prices “would continue to have upward pressure in the coming months,” said PNC economist

Kurt Rankin.

While the relationship between the two measurements is indirect, that pattern has been consistent as the economy emerges from its pandemic-induced slowdown. May’s jump in consumer inflation didn’t come as a total surprise because “PPI was telling us that this number was coming, that inflation was going to stay high in response to higher oil prices,” Mr. Rankin said.

Consumer demand for goods and services has outpaced supply. Shortages of commodities like wheat and precious metals, along with new restrictions on buying Russian oil, have been exacerbated by the continuing war in Ukraine. Rolling Covid-19 lockdowns in China have roiled supply chains that had begun to resolve snarls from earlier in the pandemic.

Sustained high prices for inputs that have been in short supply because of the war and other global trade issues are unlikely to be resolved soon and have likely become baked into prices for other goods and services, economists say.

In recent weeks, executives at food suppliers and restaurant chains have complained of rapidly-rising prices for labor, packaging, ingredients and transportation. The rising cost of fuel is making it more expensive to produce and sell food. Food retailers and restaurants have said they are passing along some wholesale price increases and additional costs to consumers.

“Unlike gasoline, where energy prices feed through very quickly, the pass-through of commodity prices gains to utilities and food takes longer, which makes these components more sticky” said

Aneta Markowska,

chief economist at Jefferies LLC. The breadth of the cost increases is likely to contribute to sustained price pressures.

In the early stages of the current period of inflation, many companies were able to pass higher costs along to consumers by raising prices. Analysts expect the S&P 500 net profit margin to come in at 12.3% for the first quarter, above the five-year average of 11.1%, according to FactSet. But there are signs that that trend may be reaching its end.

The stock market has been jolted by high-profile examples of costs squeezing corporate earnings. Last month,

Walmart Inc.

said higher product, supply-chain and employee costs eroded its profit.

Target Corp.

shares plummeted 25% the following day after the company said it would absorb elevated costs this year instead of raising prices.

Along with higher prices from suppliers, businesses are dealing with an unusually tight U.S. labor market, with demand for workers outstripping supply by nearly two job openings for every available unemployed worker. Although there are some early signs the labor market is starting to cool, employers added 390,000 jobs last month and the unemployment rate hovered near a half-century low at 3.6%. Fewer Americans are employed as a share of the population than before the pandemic, even after a run of gains that has led to the creation of 6.5 million jobs in a year.

As a measure of price pressures, the PPI differs from the Labor Department’s more widely followed consumer-price index, which only measures the final prices paid directly by households for goods and services.

The PPI also includes prices paid by companies, governments, third-party payers such as insurers and buyers in other countries. The CPI, unlike the PPI, includes taxes and user charges and the prices of imported goods and services, because they are part of the total costs paid by consumers.

Write to Gabriel T. Rubin at gabriel.rubin@wsj.com