PPI rebuts Powell’s view that inflation softness will pass

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The April producer price index grew less than expected, suggesting inflationary pressure will remain weak, in contrast to Federal Reserve Board Chair Jerome Powell’s characterization of soft inflation as temporary.

The core price index, which excludes food and energy prices, rose 2.4% in April on a year-over-year basis, missing estimates of 2.5% growth, the Labor Department reported Thursday.

The index for the month grew 0.2% and 0.1% excluding food and energy, missing projections of 0.3% and 0.2% gains.

When excluding food, energy and trade, PPI rose 0.4% in the month and 2.2% year-over-year.

“Note that the year-over-year changes in the headline and core PPI topped 3% in mid-2018 and now are barely above 2%, reflecting only modest price pressures,” Berenberg U.S. Economist Roiana Reid said in a note. “The deceleration in nominal GDP growth following its strong acceleration in 2018 is constraining business pricing power, while innovations in products and distribution continue to suppress the official quality-adjusted inflation measures.”

Since 2012, when the Fed targeted 2% inflation, it has mostly missed to the downside. Inflation remains soft, Reid said, “and that should translate to the Fed’s preferred measures of inflation, headline and core PCE inflation staying below 2% in the medium term (we forecast that core inflation will remain below 2% through early next year — that is not transitory).”

While “inflation modestly below 2% is not a bad thing, it is actually positive for the economy,” she said, “It just puts the Fed in an awkward position with its ‘symmetrical’ 2% inflation target.”

Bryce Doty, senior portfolio manager at Sit Fixed Income, said, “The smoothing effect from the year-over-year numbers does provide Powell some cover, but a couple more months of low inflation readings and we may have a ‘the emperor has no clothes’ moment on our hands.”

Since markets are focusing on trade matters, “it’s tough to say the drop in Treasury yields is reflecting lower inflation expectations,” he added.

“Of course, there is still a solid argument to be made that we can’t count on productivity to offset 2.4% increases in goods prices (PPI) on top of 3.2% wage gains forever," Doty said. “Without continued strong gains in productivity, the inflation rate will turn higher. Perhaps this is what Powell is banking on.”

Other data
Separately, the U.S. international trade deficit grew 1.5% to $50.0 billion in March, after the February gap was revised to $49.3 billion from the $49.4 billion originally reported. The deficit was smaller than the $51.5 billion shortfall expected by economists polled by IFR Markets.

The goods deficit with China fell 16.2% to $20.7 billion, the lowest in five year, the Commerce Department reported, as imported declined 6.1% while exports gained 23.6%.

The labor market remained strong as initial claims for state unemployment benefits dipped to a seasonally adjusted 228,000 level in the week ended May 4, from an unrevised 230,000 the prior week. Continuing claims fell 13,000 to 1.68 million in the week ended April 27. Also reported Thursday, March wholesale inventories fell 0.1%, while wholesale sales surged 2.3% in the month. The March inventories/sales ratio rose to 1.32 from 1.29 for March 2018.

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