In another constructive development for the disinflation narrative in the US, producer prices across the world’s largest economy fell 0.5% in March from the prior month, below every estimate from more than four-dozen economists.
Consensus expected an unchanged print. The range of guesses was -0.3% to 0.3%.
February’s MoM decline was revised to show no change from the prior month. March’s drop was the largest since the fleeting deflationary impulse that accompanied the original pandemic lockdowns.
Excluding food and energy, final demand prices fell 0.1% against consensus expectations for a 0.2% gain. The ex-trade services print, at 0.1%, was just a third of the expected MoM advance.
The data came on the heels of what I described as a “relatively benign” read on consumer price growth for March. The PPI figures should add to any sense of relief engendered by the CPI report, but neither will be sufficient to dissuade the Fed from one final hike in May.
We’re now lapping the war comps. The headline PPI gauge rose just 2.7% YoY, below estimates and the slowest 12-month pace in more than two years.
Excluding food and energy, the YoY pace was 3.4%, matching estimates. Final demand for personal consumption fell 0.4% from February, and rose 2.7% YoY.
Two-thirds of the drop in the headline gauge was traceable to goods, where a 1% MoM decline was attributable to a large drop (6.4%) on the energy gauge. Notably, the food index moved up after three consecutive monthly declines. Wednesday’s CPI report showed food at home prices fell MoM for the first time since late 2020 in March.
The 0.3% drop in final demand services was the biggest decline in almost three years. A core measure of final demand services, which strips out trade, transportation and warehousing, inched higher.
Meanwhile, US jobless claims rose more than expected, to 239,000. The data was recently revised and now suggests claims were higher this year than previously reported.
Initial claims rose 11,000 in the week to April 8, bringing the four-week moving average to 240,000. Continuing claims fell in the week ended April 1 and were below estimates at 1.81 million.
Disinflation is a work in progress, and markets are unlikely to receive unequivocally good news anytime soon. That’s just a roundabout way of suggesting that if you want to find a reason to discount or otherwise downplay cooler-than-expected inflation readings or, relatedly, jobs data that points to labor market normalization, you’ll have plenty of opportunities.
With that caveat, the tide appears to be turning. The question is whether it’ll go out so fast that there won’t be enough time to plan the disinflation party before the recession hits.
Your wording of the last paragraph brings tsunamis to mind. Right now a little kid playing on the beach is running up to his parents. “Hey Mommy, Daddy, look! The ocean went away!”
There probably is not a lot of time before the recession strikes. A lot of hawks are going to get their wings clipped pretty soon. Its hard to say what the Fed will do after May. It will not surprise me to see fed funds with a 1 handle in the latter half of 2024 though.
I would love to be pointed to a good comparison of PPI and CPI.
From what I see, PPI and CPI track each other fairly well, with PPI having much larger amplitude; see YOY chart. https://fred.stlouisfed.org/graph/fredgraph.png?g=12sHT (I hope these chart links work, but you can just go make them at FRED.)
The biggest difference between PPI and CPI component weights is that PPI does not include shelter, while CPI is 34% shelter.
Thus PPI and CPI ex-shelter track each other even better; see chart. https://fred.stlouisfed.org/graph/?g=12sIh
PPI and CPI non-durable goods track better yet. https://fred.stlouisfed.org/graph/fredgraph.png?g=12sKe Better than PPI and CPI durable goods.
Historically, PPI YOY hardly ever declines from positive to zero without continuing to negative. When PPI YOY is a substantial negative (below negative mid-single-digit) CPI ex-shelter usually goes negative.
A peak and decline in PPI YOY is sometimes associated with a recession, but not closely enough (hit rate and timing) to make it a useful indicator, in my opinion.
Anyway, I think the PPI YOY trend is promising on the inflation ex-shelter front. Shelter YOY seems to peak around when actual prices (Case-Schiller) YOY goes negative, which seems imminent.
My base case is the Fed does 25bp in May and then moves to the sidelines, inflation continues to decline on a path to reach 2% in the coming year, that the labor market weakens on a lag with UE exceeding 4% later this year, and that weaker demand and narrowing margins make up for the still-low UE rate.
+1
As I read this and recalled a couple other posts a while back, something interesting occurred to me. When people of limited means get laid off, they probably file for unemployment as soon as they can. They are the heart of the filing data. On the other hand, higher level managers who receive full pay severance for some months don’t file because it’s a hassle, the money isn’t really needed (except to pay for COBRA), and they don’t really want to look for a job right away. Both my daughter and her husband were making six figures as senior directors and are now laid off, don’t plan to make a serious run at a new job until their child goes back to school in the fall. People like this don’t show up in the claims data, something which likely skews these many employment reports. No reason anyone will know they are laid off. Has anyone tried to study this issue of varying responses to being laid off and how it effects our economic metrics?