It seems like there’s a bit of good news on the inflation front. Falling egg and gasoline prices have helped ease the inflation burden, which is a relief for many. The Bureau of Labor Statistics (BLS) revealed that the producer price index (PPI) saw a surprising drop of 0.4 percent in March. This marks the first decline in this monthly metric since October 2023, which is definitely a positive sign for the economy.
The consensus was that we’d see a modest 0.2 percent increase, so this drop is quite the unexpected twist. Core PPI inflation, when you take out energy and food, dipped to a lower-than-expected 0.1 percent. The BLS noted that more than two-thirds of the decline in final demand prices came from a 0.9 percent decrease in goods prices, largely due to a 21.3 percent fall in egg costs and an 11.1 percent drop in gasoline prices.
Service inflation also slipped by 0.2 percent, which adds to the positive outlook. Looking at the 12-month figures, both headline PPI inflation and core PPI inflation slowed down to a better-than-expected 2.7 percent and 3.3 percent, respectively. Economists often keep an eye on wholesale prices, as they can indicate upcoming changes in inflation since they are early in the supply chain.
On the consumer side, the consumer price index (CPI) showed that the annual inflation rate sharply dropped to a six-month low of 2.4 percent from 2.8 percent in February. This is the first time consumer prices fell monthly by 0.1 percent since May 2020. But, there’s a looming question: Are these inflation reports painting an outdated picture?
There’s been quite a bit happening on the trade front. President Donald Trump’s tariffs on automobiles, steel, and aluminum have kicked in, and he announced an increase in U.S. duties on Chinese goods to 145 percent. Additionally, Trump’s 10 percent universal tariffs on almost all imports have taken effect, stirring up inflation concerns.
Bill Adams, the chief economist for Comerica Bank, coined the term “tarifflation,” expressing concerns that these tariffs could lead to higher inflation in the coming months. He mentioned in a note to The Epoch Times that “tarifflation will be much more important for the outlook than backward-looking data.” Treasury Secretary Scott Bessent, in an interview with NBC’s “Meet the Press,” suggested that this might lead to a one-time price adjustment.
RBC economists predict that about 10 percent of U.S. consumer spending sourced from abroad could face renewed price pressures due to higher tariffs. They expect U.S. core inflation to spike to 4.3 percent by the third quarter. Core inflation recently dropped below 3 percent, marking the first time in four years that it has fallen to this level.
Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, suggests tariff effects could lead to renewed short-term inflation. While the March CPI showed positive trends, Kashkari worries that the high tariff rates could make the data seem outdated. “After the pause, the effective tariffs are still 100-year highs,” he noted in an interview with CNBC’s “Squawk Box.”
Federal Reserve Chair Jerome Powell recently emphasized that the central bank’s role is to ensure long-term inflation doesn’t spiral out of control. Short- and long-term inflation expectations have risen among consumers, according to the preliminary April University of Michigan Consumer Sentiment Index. They reported one- and five-year inflation horizons climbing to 6.7 percent and 4.4 percent, respectively.
Chris Zaccarelli, the CIO for Northlight Asset Management, believes the Fed might hold off on any rate cuts if these inflation numbers persist and high tariff rates are removed. However, if the economy takes a downturn, he suggests the Fed might need to step in and cut rates. Investors generally expect the Fed to keep interest rate cuts on hold at their next meeting.
Despite the better-than-expected PPI report, U.S. stocks saw some red at the end of the trading week. The major averages, including the Dow Jones Industrial Average and the Nasdaq Composite Index, dipped about 0.6 percent. Meanwhile, U.S. Treasury yields rose, with the 10-year yield firming above 4.5 percent.
In the currency market, the U.S. dollar index, which measures the dollar against a basket of currencies like the yen and the euro, fell below 100.00 for the first time since July 2023. This fluctuation in the dollar’s value is something to keep an eye on, as it can influence global trade dynamics. As these economic developments unfold, it’s crucial to stay informed and prepared for any shifts in the financial landscape.
