INDICATOR: March Producer Price Index

KEY DATA: PPI: +1.1%; Excluding Food and Energy: +0.2%

IN A NUTSHELL:   “Wholesale costs are rising and the consumer should expect more shocks at the supermarket and the gas station.”

WHAT IT MEANS:  Producer costs jumped in March led, not surprisingly, by another huge surge in both food and energy.  Over the past three months, wholesale prices for food has increased at a 10% annualized pace while energy has jumped at a 22.5% rate.  Is there any wonder why people are depressed?  Excluding food and energy, producer prices rose more moderately in March, but that deceleration came after two fairly large gains in January and February.  It is not clear if the sharp increases early in the year were aberrations or the start of something to be really worried about.  The one area where prices did remain in check was capital goods.  Except for oil field equipment and transformers, businesses didn’t have to face the rising costs of new machinery and equipment that consumers have for their staples.  As for the pipeline, the picture is ugly.  Prices for just about everything at the intermediate and crude levels are surging.  In the current environment, we may see more of that flow into finished goods than has been the case over the past few years.  

MARKETS AND FED POLICY IMPLICATIONS: This was a worrisome report more for consumer spending than inflation.  Since the increases in food and energy usually filter into consumer costs very quickly, households will be seeing even more of their income going to these products. We have already seen that consumer spending on discretionary goods is being cut and further price surges in staples will likely depress consumption even more.  But when you look at the increases in non-food and energy consumer products, the rise has been reasonable.  Finished consumer goods excluding the problem children have increased only 3.2% over the year, about in line with core consumer prices.  Non-food and energy inflation remains elevated but not outrageous.  Of course don’t make that argument to individuals, who are seeing so much of their income go to the necessities of life.  The inflation hawks on the Fed will likely ratchet up their screeching and this report doesn’t help those who are focusing on the economy.  As for the markets, you have to believe that bond buyers will actually start worrying about inflation sometime.  This report may not make much of an impact on the equity markets, as it is earnings time