U.S. producer prices surge in April, adding to inflation pipeline

U.S. producer prices surge in April, adding to inflation pipeline

*The PPI for final demand jumped 0.6% in April following its 1.0% monthly rise in March, lifting its yr/yr increase to 6.2% and its annualized increase in the last six months to 7.1% (Chart 1). Excluding food and energy, the PPI for final demand increased 0.7% in April, lifting its yr/yr increase to 4.1% and 6.4% annualized in the last six months (Chart 2). The Bureau of Labor Statistics Report showed accelerating production costs on many levels — final demand, intermediate and crude materials — and across a wide array of products. The pipeline for inflation is filling up (Table 1).

*The PPI for final demand energy fell 2.5% mo/mo following its surge in recent months, but it is up 46.9% yr/yr. Even though core measures of the PPI exclude energy (and food) costs the elevated level of energy costs will continue to add significantly to production costs.

*The PPI for final demand for goods increased 0.6% mo/mo and 10.7% yr/yr while the PPI for services increased 0.6% in April, boosting its yr/yr increase to 4.0% and 8.1% yr/yr (the price index for transportation and warehousing increased 2.1% mo/mo and 8.1% yr/yr).

*Under the BLS’s old methodology, which provides historical context, the 9.4% yr/yr increase in the PPI for finished goods was just shy of its June 2008 peak increase and higher than any other point going back to 1980, while the 18.5% yr/yr increase for intermediate goods was the highest since 1980 and the 57.8% yr/yr increase in crude goods was the highest since 1973.

*This PPI report highlights the acceleration of rising production costs. There is mounting anecdotal evidence that businesses are raising product prices. If, as we expect, aggregate demand in the economy remains strong, businesses will have flexibility to increase prices further.

*The pipeline for higher trend inflation is rising. When will the Federal Reserve change its tune and acknowledge that the rise in inflation is more than temporary? It runs the risk of losing credibility if it delays and inflation pressures persist.

Chart 1. PPI for Final Demand

Chart 2. PPI for Final Demand excluding food, energy, and trade services

Table 1.

Mickey Levy, mickey.levy@berenberg-us.com

Member FINRA & SIPC
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