After three hot inflation reports helped push back the timing of the Federal Reserve’s long-awaited first-quarter interest rate cut, investors were hoping to see signs of a cooling in producer prices this week. Instead, ahead of Wednesday’s all-important CPI reading, markets received a warning sign.
The producer price index, which measures the prices manufacturers and service providers receive for the goods they sell, jumped 0.5% in April, beating the consensus estimate of 0.3%, the Bureau of Labor Statistics said. reported Tuesday. However, since the March figures were revised from a gain of 0.2% to a decrease of 0.1%, things may not be as bad as they seem.
As Capital Economics North America chief economist Paul Ashworth explained on Tuesday, the “larger-than-expected” jump in producer price inflation in April was “largely driven by downward revisions to previous months.” As a result, annual producer price inflation accelerated only slightly, from 2.1% in March to 2.2% last month.
Ashworth also noted that the slight increase in annual producer price inflation was largely the result of a 5.4% increase in gasoline prices. And given the recent fall in crude oil prices, he argues that the trend “should more than reverse in May.”
However, Ashworth noted that rising producer price inflation could affect one key part of the Fed’s favorite inflation gauge: the core personal consumption expenditures (PCE) price index.
“The PPI may have a particularly large impact on essential services other than housing, i.e. supercor. In this regard, the April news was mixed, but overall encouraging,” he wrote.
While goods prices jumped 0.4% in April, it was the 0.6% jump in services prices that accounted for three-quarters of the total increase in the producer price index. Last month, service sector inflation reached its highest level since July 2023. However, a huge 3.9% jump in monthly portfolio management services costs was the main reason for the increase in service inflation.
For Greg Daco, chief economist at EY, this means there is “no reason to worry.”
“Strong stock market performance contributed in part to the growth,” he wrote on the page X, citing a jump in the cost of portfolio management services. “But airfare prices [were] sharply down, car insurance [was] fixed and general markups on consumer goods [were] down.”
This is the long-awaited and bumpy last mile of the Fed’s fight against inflation.
For years now, Fed Chairman Jerome Powell has warned that the road to reining in inflation will be “bumpy,” and economists have warned that the “last mile” of the Fed’s fight against inflation will be the hardest. Now those forecasts are proving prophetic after multiple reports of hot inflation in 2024.
For Quincy Crosby, chief global strategist at LPL Financial, the latest producer price inflation report is another sign that investors expecting short-term interest rate cuts may be overly optimistic amid a difficult final battle against inflation. “The likelihood of interest rate cuts has slowed again as the Fed’s schedule to initiate a rate easing cycle is hampered by stubbornly high prices,” she said. Luck by email.
However, investors largely shrugged off the higher-than-forecast inflation figures. The Dow Jones Industrial Average was little changed by midday Tuesday, while the S&P 500 and the tech-heavy Nasdaq Composite were in the green, albeit only slightly.
Scott Helfstein, senior vice president and head of investment strategy at Global X, said the muted investor reaction is a result of inflation and Fed policy becoming less important than economic growth and earnings in recent months.
“Companies have adapted to the new reality of higher prices and continue to seek technological solutions to generate profits,” he said. Luck by email. “The last mile of inflation will always be the hardest, but we should be comfortable with these numbers.”
And David Russell, head of global market strategy at TradeStation, also noted that despite the slight rise in producer price inflation, the Fed doesn’t want to cause more economic pain than necessary by keeping interest rates too high for too long. “Investors know the Fed wants to stop raising rates, so today’s PPI report may be little more than background noise. It doesn’t change the narrative, at least not yet,” he said. Luck by email.
All eyes on the consumer price index
The April producer price inflation report was not good news for the economy and markets, but it is not a major cause for concern for most experts. However, if Wednesday’s consumer price index, which measures inflation for the average American, is higher than expected, it will be a different story.
“Rightly or wrongly, the CPI tends to have a larger short-term impact on markets, so the picture could look very different 24 hours from now,” Chris Larkin, managing director of trading and investing for E*TRADE at Morgan Stanley, explained. “If the consumer price index also comes in above expectations, the interest rate picture could be called into question… hotter inflation data could spark debate over whether 2024 will contain at least one cut.”
Chris Zaccarelli, chief investment officer of the Independent Advisor Alliance, echoed the idea, saying “the most important data release is tomorrow’s release of the Consumer Price Index.”
“Today’s CPI bodes poorly for tomorrow’s CPI (even though the relationship between the two is somewhat complex), and if the market is spooked by today’s higher-than-expected PPI, it will be even more concerned about a higher-than-expected PPI. , consumer price index. -expected consumer price index tomorrow,” he said. Luck by email.
However, like Global X’s Helfstein, Zaccarelli argues that the stock market can still perform throughout the year thanks to strong corporate earnings and stable consumer spending – even though there may be some volatility and “inflation data will keep the Fed on its toes.” . “