The U.S. Bureau of Labor Statistics (BLS) reported on Thursday that the Producer Price Index for final demand jumped up 0.6% (seasonally adjusted) in March, doubling expectations for a 0.3% monthly increase. This follows a 0.1% increase in February and a 0.1% decrease in January. On an annual basis (unadjusted), the PPI increased 2.2%, exceeding expectations for a 1.9% annual increase, following a 1.9% annual rate of advance in February.
Breaking the reading down further, the monthly headline move can be attributed to a 1.0% increase in the prices for final demand goods, which accounted for over 60% of the monthly advance, and a 0.3% increase for the final demand services index.
Core PPI - which excludes volatile food, energy and trade services and is often considered a more relevant metric than overall PPI due to its closer correlation to inflation - was unchanged in March following a 0.1% uptick in February and 0.2% advance in January. Additionally, the core index advanced 2.0% from the same time last year.
Digging deeper, over 80% of the move in the final demand goods index came as a result of 5.6% increase in the final demand energy index. The final demand foods index, also advanced in March, ticking up 0.3%. The index for final demand goods less foods and energy edged up 0.2% in March. On an unadjusted annual basis, the final demand foods index ticked up 0.1% while the final demand energy index declined 0.4% from March 2018.
As for final demand services, the monthly move came as a result of a 1.1% increase in the index for final demand trade services (which measure the changes in margin received by wholesalers and retailers), which was partially offset by a 0.8% decline in prices for final demand transportation and warehousing services. The final demand less trade, transportation, and warehousing index was unchanged in March.
December's PPI numbers follow yesterday's Consumer Price Index (CPI) reading (here), which also exceeded expectations.
As a reminder, the PPI measures price changes from producers' perspectives, while the CPI gauges price changes from the consumer's viewpoint. The two indices tend to be correlated, as producers and retailers often pass on cost increases to the consumer. However, divergence can occur, as the two indices track slightly different metrics. For instance, CPI includes imports and owners' equivalent rent, two metrics that PPI excludes. Another difference is taxes, which consumers pay on purchases and are included in CPI - but not PPI, as they are not a part of producer revenue.
All in, as stated in our CPI alert yesterday, this is exactly what we want to see when it comes to macroeconomic readings as the monthly beat, coupled with an annual increase in the core index of 2.0%, points to a resilient and expanding U.S. economy that is on track but not so hot that it warrants further Fed rate hikes in the near-to-mid-term. Given the rate of advance in the core index, we reiterate our view that the Federal Funds rate is right in the sweet spot, allowing for manageable inflation without derailing the ongoing U.S. expansion. Given this ideal monetary policy, we continue to look to Washington for a trade deal with China and maintain that a meaningful and enforceable deal remains the key catalyst that will allow us to take the next leg higher.
Members interested in digging even deeper into the PPI can view the official release of the data, here. The report also provides more detail on what the PPI tracks, as well as the differences between the PPI and the CPI.
Lastly, for those interested in applying this reading to their own portfolio, we note that the main factor to keep in mind is what the likely inputs are for the company in question and how the monthly change in those input prices may impact margins - and therefore profitability going forward.