Producer Price Woes: When the Markets Have to Deal With 3% Inflation

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The markets are still worried about inflation, and Tuesday’s stock market gains may sort of overshadow the underlying inflation pressure being seen right now. A new inflation reading has been released in March’s Producer Price Index (PPI) for Final Demand. The monthly PPI reading was hotter than expected, but the year-over-year PPI was a hot.

The Bureau of Labor Statistics (BLS) reported that the monthly PPI reading was up 0.3% on the headline and up 0.3% on the core reading excluding volatile food and energy. Then if you back out trade services, the true core PPI was up 0.4% on the monthly reading in March.

As far as consensus estimates, Dow Jones and Bloomberg were both calling for 0.1% in overall price gains. The BLS noted that 70% of the rise in the final demand index for March is attributable to a 0.3% rise in prices for final demand services. The index for final demand goods also climbed 0.3%.

The headline PPI on a year-over-year basis was up a hot 3.0% and the core PPI on that basis was up 2.7%. The annual change for core prices and excluding trade services was up 2.9%. As a reminder, the Federal Reserve is targeting just 2.0% inflation as a base level, and there had been an upper band target for inflation of 2.5%.

One driving force behind the gains is that fading gasoline prices are no longer present, and employers have noted wage pressures and further price pressures on many fronts. The BLS also outlined product details for March:

A major factor in the March advance in prices for final demand services was the index for outpatient care (partial), which climbed 0.4 percent. The indexes for machinery, equipment, parts, and supplies wholesaling; cable and satellite subscriber services; airline passenger services; food and alcohol wholesaling; and hospital inpatient care also moved higher. In contrast, margins for automotive fuels and lubricants retailing fell 10.4 percent. The indexes for apparel, footwear, and accessories retailing and wireless telecommunications services also decreased.

After an hour of trading, the Dow Jones industrial average was up 421 points to 24,400 and the S&P 500 was up almost 39 points at 2,652. Crude oil was up $1.32 (2%) at $64.74 per barrel. The yield on the 10-year Treasury was last seen up only one basis point at 2.795%.