April Producer Prices

In April, according to the Bureau of Labor Statistics, America’s Producer Price Index (PPI), a measure of changes in wholesale costs, fell as expected by -0.7% at the headline level.  This weakness follows on the -0.6% decline registered in March, bringing the year-over-year increase in prices down -0.4% to a surprisingly low (but still positive) 0.7%.  The core rate, designed to exclude the volatility of food and energy prices, grew a scant 0.1%, half the already slim consensus expectation, but it remains unchanged from last month, showing a 1.7% rise from a year ago.

The large disparity between April’s headline and core measures points to a substantial decline in prices for both food and energy.  Food costs were down 0.8% for the month, having risen in March by that same amount.  Energy prices fell 2.5% on top of the previous monthly 3.4% drop as gasoline came off a full 6.0%, following its 6.8% March fall.

The Federal Reserve does not want to see broad price declines become habitual.  They would prefer to see an annualized level of inflation hovering around two percent or so.  They have established this as a stated goal and are actively managing their balance sheet to make it so.  Looking deeper into this report, here at Atlas we believe the Fed may be seeing some concerning trends.  Prices at the level of crude goods (think corn) fell -0.4% in April.  Intermediate goods (think corn meal) recorded a -0.6% drop.  And the headline (e.g. corn bread mix) was off -0.7% as stated above.  Oddly enough, the equity markets may take a shine to this report, not because it suggests lower prices down the line, but because it provides evidence that the Fed will keep rates low for awhile longer yet while continuing to inject billions of dollars into the banking system every month.    (by J R)