So, about that “pipeline disinflation” story.
Markets were treated to yet another hot data release out of the US economy on Thursday, when the BLS said producer price growth in January ran at nearly double the expected pace.
The 0.7% monthly increase on the headline final demand gauge matched the highest estimate from nearly six-dozen economists, and handily topped consensus.
December’s MoM decline was revised to show a much smaller drop. January’s print was the hottest since June, and came courtesy of meaningful increases on both the goods and services side. The ex-food, energy and trade print was 0.6%, the highest since March.
The 1.2% jump on the goods gauge was attributable to a 5% increase for the energy index. Gasoline prices rose more than 6%. But that was hardly the whole story, even if it was two-thirds of it. As the government noted, “indexes for residential natural gas, diesel fuel, jet fuel, soft drinks and motor vehicles also moved higher.” Excluding food and energy, goods prices rose 0.6% from December, the biggest jump in eight months.
On the services side, the BLS cited a large increase in an index of hospital outpatient care, but the release was quick to add that gauges for autos, health, beauty, portfolio management, chemicals and airline passenger services (among others) all rose too. The transportation and warehousing index logged its first monthly gain since June.
The YoY prints missed (or, technically, beat) by a mile. The headline index rose 6% versus 12 months ago, far hotter than the 5.4% consensus expected.
The ex-food and energy print, 5.4%, was likewise a mile higher than economists anticipated (consensus there was 4.9%).
Without drilling too far down into the specifics, which readers tend not to be particularly interested in, it was fair to call Thursday’s PPI figures an across-the-board beat. And, again, “beat” isn’t a good thing in this context.
The “pipeline disinflation” narrative does have merit, particularly in housing, but if we’re using that phrase in the more traditional sense (i.e., if we’re just referring to wholesale prices as opposed to referencing verbatim or near-verbatim soundbites from Fed officials), then Thursday’s data cast doubt on the notion that price pressures are set to abate further in any systematic, economy-wide way.
When considered with Wednesday’s retail sales blowout and the January jobs report, the argument for a near-term Fed pivot is as good as dead. The medium-term case isn’t looking very convincing either. The “no landing” narrative, by contrast, appears more plausible by the day.
I am rethinking my initial hypothesis about the potentially deflationary impacts of generative AI. While I do still believe that it will be deflationary and help resolve labor shortages in a few years, we might see near term inflationary pressures due to the increased demand for computing power. The pandemic-driven shortage in semiconductors may have given us a preview of what happens when we can’t produce enough semiconductors for generative AI. I’m starting to think we’re gonna need a bigger boat when it comes to terminal rates.
The economy is clearly doing better, although I have some doubt about the accuracy of some of the seasonals. There will be no pivot in the near future that is for sure.