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US Wholesale Prices Rise More than Anticipated

Posted by Joseph Trevisani on May 11, 2017 1:22:06 PM

Inflation at the production level increased more than expected in April which could add to price pressures on consumers in the months ahead as the higher costs surface in retail stores.

The producer price index (PPI) jumped 0.5 percent after falling 0.1 percent in March and rising 0.3 percent and 0.5 percent in February and January, reported the Labor Department in Washington, D.C. on Thursday.  Analysts in the Reuters survey had forecast a gain of 0.2 percent. Wholesale prices have risen sharply since touching -0.5 percent in September 2015. 

The year over year gain in producer prices, also known as PPI Final Demand, surged to 2.5 percent in April from 2.3 percent in March, well ahead of the 2.2 percent expectation.  It was the faster rate of increase in more than five years since 2.8 percent in February 2012.  The 12 months moving average for headline PPI was 2.3 percent. It has climbed steadily after reaching -1.3 percent in December 2015 and is now the strongest since May 2012. 

Core PPI inflation, excluding food and energy prices, was slightly more subdued in April, up 0.4 percent following a flat result in March and two 0.3 percent increases in January and February.  Annual core PPI rose to 1.9 percent April, its highest in just over two years, from 1.6 percent in March, 1.5 percent in February and 1.2 percent in January. Core PPI has also jumped dramatically since bottoming at 0.2 percent in December 2015. 

Despite the sharp decline in energy prices in the latter part of April, West Texas Intermediate, the U.S. crude standard, fell 7.6 percent, from $53.40 on April 11th to $49.93 on the 28th, core producer prices rose almost as fast as headline prices, 0.4 percent vs 0.5 percent. This suggests that production price inflation may be more rooted than a transitory response to energy price gyrations.

Core CPI inflation has been at or above the Federal Reserve’s 2.0 percent target for 17 months. Headline CPI inflation, which includes the damping effect of recent energy prices, has been over target for four months.  

The Fed's preferred measure of inflation, the core PCE price index, was at 1.6 percent in March, and has averaged 1.7 percent over the last twelve months. It has not touched 2.0 percent since April 2012. 

Consumers whose spending accounts for about 70 percent of U.S. gross domestic product, are not able to choose their preferred inflation rate. They must count the actual inflation at the cash register, either CPI at 2.4 percent or PCE at 2.1 percent, against their wages. With annual average hourly earnings rising just 2.5 percent in the latest month, there are scare extra dollars in the household budget to boost U.S. economic growth. 

 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Thomson/Reuters

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