US PPI To Ease From March Highs

Higher chance of an upside surprise in PPI for April 2019

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The Labor Department will be releasing the monthly producer prices index report later today. A poll of economists shows that the median estimates point to a somewhat weaker pace of increase in the PPI.

Economists expect headline PPI to rise just 0.2%on a month over month basis in April. Core PPI is also forecast to rise by 0.2% on the month.

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Comparing to the PPI figures from March, the expectations for April point to an easing in the PPI data.

In March, producer prices rose 0.6% on the headline and 0.3% on the core PPI measures. But looking at the underlying data, there is scope for April’s producer prices index data to spring an upside surprise.

U.S. PPI
U.S. PPI – Final Demand, March 2019

The PPI data due today comes out ahead of Friday’s consumer inflation report.

Consumer prices have been weak over the past few months. However, the recent Fed meeting saw the central bank calling this weakness in inflation transitory.

An uptick in the producer prices index data could potentially give a boost to the consumer prices report. This could lead to a pickup in expectations that interest rates in the US will continue to hold at the current levels.

Some market watchers have been estimating that there is scope for the Federal Reserve to cut interest rates. Ahead of last week’s FOMC meeting, President Trump tweeted that the Fed should lower rates by 1%.

But recent data shows that the US economy is powering on all cylinders. However, there are some concerns about weakness in leading indicators such as manufacturing and non-manufacturing activity.

Why Producer Prices Rose to a 5-month High in March

The producer prices index report for March surprised many. Beating estimates, factory gate inflation rose 0.6% on the month in March. This pushed the annual PPI rate to 2.2% on the year ending March 2019.

The gains in March were the highest monthly increase since October 2018.

Core PPI, which excludes the food and energy prices that are volatile, rose 0.1% for the same period. This pushed the annual core PPI rate to 2.0%. Interestingly, the gains in the core PPI were the smallest since August 2017.

Data shows that the gains in the producer prices index came due to higher energy prices. Gasoline prices alone jumped 16% during the month. The final demand for the energy sector rose 5.6% on the month. This was the only item on the PPI report that posted significant gains.

In March, WTI crude oil prices grew 5.07%, contributing to higher energy prices.

Can Producer Prices Maintain the Bullish Trend in April?

The forecasts for April point to the fact that headline PPI could ease from the strong gains in March. However, energy prices have been trending higher during April. WTI crude oil prices extended gains, rising 5.47% during the month.

There was also significant demand in energy prices during the period. Crude oil inventories posted a draw for two consecutive weeks before inventories started to rise again.

Comparing this to April, there has been a significant build-up in oil inventories over the four weeks in April.

There is a good chance that headline PPI could beat the conservative estimates of a 0.2% increase.

We expect headline PPI to rise about 0.3% – 0.5% on a month over month basis in April.

Investors should be looking to see how the core PPI will fare during the month. While oil prices are contributing to the gains in the headline PPI, core PPI is rising at a slower pace in comparison.

This indicates that the final demand for services excluding the volatile items is rising at a slower pace in comparison.

Traditionally, the inflation data for April tends to be higher due to the seasonal effects of the Easter holiday, which sees an increase in final demand for services.

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