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Fears about inflation, already quite high, increased a little further this morning, as the U.S. Labor Department reported that inflation at the producer, or wholesale, level had jumped by 0.8% in April. That was the fourth large monthly gain in succession this year and the seventh straight monthly increase of 0.5%, or more, going back to October of last year. Clearly, soaring energy prices, at least until the past couple of weeks, and selectively rising food costs, are the major concerns at this point. If we back out these two volatile commodity variables from the overall mix to get the so-called core rate of producer price inflation, we find that prices rose by a less-onerous 0.3% in April, matching the gain in March; but that was a tenth of a percentage point higher than had been widely forecast.
 
Overall, the 0.8% increase in the aggregate April Producer Price Index, was occasioned by a jump of 2.5% in energy prices. That was nearly as large an increase as the 2.6% runup in March. The respective gains in January and February in energy costs were 2.8% and 3.3%. Meanwhile, food costs rose last month, climbing by 0.3%, reversing a rare drop in March of 0.2%. However, the March decline in food prices followed a shocking 3.9% surge in that category in February.
 
Also, further down the supply chain, producer prices for intermediate goods rose by 1.3% last month, following a jump of 1.5% in March. Also, respective gains of 1.3% and 2.0% were recorded in January and February. Intermediate goods inflation has been at 0.9%, or higher, in every month since last October. As for crude goods, which as the name implies, are even further down the production pipeline, they rose by a sharp 4.0% in April, more than reversing a drop of 0.5% in March. That surprise one-month decline followed increases of 2.7% and 3.4%, respectively, in January and February.
 
Overall, then, the inflation picture is now somewhat troubling, with producer prices on a 12-month basis up by a staggering 6.8%, easily exceeding the pace of inflation for any one-year period in sometime. In fact, this latest 12-month gain is the first such increase to top 6% in several years. The latest PPI surge prompted Federal Reserve Board governor Plosser, this morning, to conclude that inflation risks were tilted to the upside. He also indicated that even with the recent selloff, commodities have risen a lot, but he does expect oil prices to level off in the months to come. He also opined that long-term inflation prospects still seemed reasonable, but that the continued steady economic growth would require some increase in interest rates before too much longer. That aside, the current inflation outlook is still not comforting to the Fed, or to many investors, for that matter.
 
Finally, tomorrow, we will get the companion inflation report when the Labor Department posts the Consumer Price Index for April. Expectations are that this more stable index, relative to the PPI, at least, will show an increase of some 0.4%; in March, the CPI climbed by 0.5%. Once again, the gains should be led by energy costs, as well as perhaps by food prices, which are even less predictable than energy cost inflation, in our view.

 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.