PPI Uneven Jump Hints at More Consumer Weakness, Trouble at Retailers

The BLS reported the Producer Price Index (PPI) for final demand rose 0.5%. This exceeded the Econoday consensus of 0.2% in a range of -0.2% to +0.3%. Details are interesting.

March was an unusually weak month for inflation and April, after yesterday’s import & export price report followed by today’s producer price report, is shaping up to prove an unusually strong month. Producer prices rose 0.5 percent to easily exceed Econoday’s high-side forecast for only 0.3 percent. Excluding food & energy, producer prices rose 0.4 percent which again is 2 tenths above the high estimate, topped off by less food, energy & trade services which jumped 0.7 percent which beats the high estimate by 4 tenths.

Gains for computers (up 1.1 percent) and cigarettes (up 2.2 percent) were major factors in the month as were guest rooms, up a monthly 8.2 percent and reflecting holiday demand tied to the late Easter. This increase is oversized and raises questions whether this year’s Easter shift, from March last year to April this year, was accurately offset by the report’s seasonal and calendar adjustments.

A rise in short-term interest rates following the Fed’s rate hike in March is also a factor in the report, raising prices for securities brokerages and loan services. A special negative in the report is a 0.3 percent decline in trade services which follows March’s 0.1 percent dip. Weakness in trade services hints at stubborn weakness in general demand and points, perhaps, to a swing lower for this report in May.

Because of the size of the monthly swings and questions surrounding Easter, March and April will have to be taken together when assessing inflation data, as it is when assessing retail sales for the two months. Today’s report points to another set of upside surprises in tomorrow’s consumer price report.

That was excellent commentary from Econoday for a change. Seasonal factors likely suppressed March and added to April.

PPI Month-Over-Month and Year-Over-Year

Above chart from the BLS PPI Report.

Final demand services

The index for final demand services moved up 0.4 percent in April after edging down 0.1 percent in March. Most of the increase can be traced to prices for final demand services less trade, transportation, and warehousing, which advanced 0.8 percent. The index for final demand transportation and warehousing services increased 0.7 percent. Conversely, margins for final demand trade services moved down 0.3 percent. (Trade indexes measure changes in margins received by wholesalers and retailers.) Product detail: Over a quarter of the April advance in the index for final demand services is attributable to
prices for securities brokerage, dealing, investment advice, and related services, which increased 6.6 percent. The indexes for guestroom rental; loan services (partial); machinery, equipment, parts, and supplies wholesaling; portfolio management; and airline passenger services also moved higher. In contrast, margins for fuels and lubricants retailing dropped 14.6 percent. The indexes for food and alcohol retailing and for deposit services (partial) also fell.

Final demand goods

Prices for final demand goods increased 0.5 percent in April following a 0.1-percent decline in March. Nearly 40 percent of the broad-based advance can be attributed to the index for final demand goods less foods and energy, which rose 0.3 percent. The indexes for final demand foods and final demand energy climbed 0.9 percent and 0.8 percent, respectively. Product detail: In April, the index for cigarettes moved up 2.2 percent. Prices for gasoline, fresh and dry vegetables, fresh fruits and melons, residential natural gas, and pharmaceutical preparations also advanced. Conversely, the index for jet fuel fell 6.1 percent. Prices for carbon steel scrap and oilseeds also declined.

Comments

• Prices for food jumped at the producer level and those prices will likely filter into to the Friday’s CPI report as will the jump in energy.
• Energy prices have fallen a bit so I would not expect another energy-related jump in May.
• The standout items are the jump in food prices and the weakness in margins at wholesalers and retailers.
• Consumer demand is very weak.

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Mike “Mish” Shedlock