Producer inflation remained elevated in May, even as the overall year-over-year number eased slightly, according to Labor Department data released on Tuesday.

The report adds pressure on the Federal Reserve, which is meeting this week and considering more aggressive measures to tame inflation. We now expect the Fed to raise its policy rate by 75 basis points on Wednesday.

Tuesday’s data did little to change the story of an economy where inflation has become more embedded. The producer price index for final demand rose by 10.8% on a year-ago basis, down slightly from 10.9% in April. The core index—excluding food and energy—went up by 8.3%, down from 8.6% the month before.

On a month-over-month basis, though, the overall producer price index grew by 0.8%, significantly higher than April’s reading at 0.4%. The increase is correlated with the spike in oil and energy prices in May that accompanied Europe’s plan to cut off Russian energy imports and the reopening of China’s economy.

The data was released four days after the consumer price index for May came in at a higher than expected 8.6%, a new 40-year high.

Core goods continued to grow at an elevated pace of 0.7% on the month while core services rose by 0.4%. Final demand for trade services—a proxy for retail and wholesale margins—rose by 0.4% after declining by 0.6% in April.

Flat growth in retail and wholesale margins in the past two months implies inflation pressure catching up quickly to pricing power as inflation remains sticky and demand slows.

This does not reflect the spending shift from goods to services as goods prices were driven mainly by higher raw materials and labor costs.

Input costs continued to eat into profit margins because of higher commodity prices and labor shortages. Prices for intermediate processed goods rose by 2.3% month-over-month, from 2% previously, while prices for unprocessed goods rose by 6.33% from 6.15% previously.

Monthly increases in prices at an earlier production stage remained much higher than the increase in final demand prices, ranging from 1% to a sharp 3.9%.

The takeaway

If inflation does not show signs of substantial relief soon, producers will have no choice but to pass through these cost increases to consumers, continuing to complicate the inflation picture.