April 2015 Producer Prices

Producers and wholesalers paid less for good and services on average in April 2015 according to the Bureau of Labor Statistics.  The monthly change for the Producer Price Index for final demand dropped below zero once again, falling 0.4 percent.  This followed March’s uptick of 0.2 percent, the only reading above the unchanged level since October 2014.  Year-over-year, the headline tally has not breached zero since December 2014, and it worsened in April to -1.3 percent from -0.8 percent a month earlier.

Both sides of the economy exhibited deflation in the period.  Final demand goods fell 0.7 percent.   Energy led this count lower, declining 2.9 percent.  Foods moved in a similar direction declining 0.9 percent.  Services dropped for the third month this year, slipping 0.1 percent.  Trade services led this portion of the economy lower caused by falling margins received by wholesalers and retailers.  Excluding trade, transportation and warehousing (publishing, lodging, banking, and healthcare for example), service prices rose 0.2 percent during the month.

Earlier stages of demand were mixed.  Processed goods for intermediate demand dropped 1.1 percent in April and are down 7.8 percent from a year ago.  Food and energy led this segment lower for the month as they were down 1.7 percent and 3.4 percent respectively.  However, the earliest stage of physical output, unprocessed goods for intermediate demand, increased for the first time in seven months, up 0.9 percent; in this stage, both food and energy costs were higher.  Despite the modest pickup in April, the year-over-year change for this earliest stage has collapsed 26.6 percent!  Finally, services for intermediate demand were 0.5 percent more expensive than in March.  Here, the twelve month change is the highest since December when it was also up 1.8 percent.

This indicator’s headline number has spent most of the last twelve months near or below zero.  However, there could be some change in the direction of the tally next month.  As Atlas noted in the retail sales missive a few days ago, energy prices have been moving higher in the past few weeks, and this could put upward pressure on the overall prices for goods.  Coupled with the apparent resistance to a strong decline in service prices, we feel this indicator could be beginning an upward trend.  If so, a period of outright deflation here in the U.S. might be avoided, a goal at the forefront of Federal Reserve policy.  If such a trend toward higher prices does manifest, Atlas worries that it may not have enough staying power to allow the central bank to begin raising rates to any meaningful extent.       (by C. Cox)