April PPI Confirms Trend of Rising Inflation

This morning, the PPI rose 0.5% in April, surpassing the 0.3% gain expected and following a 0.1% decline the month prior (revised lower from a 0.2% increase). Year-over-year, producer prices rose 2.2% in April, up from the 1.8% gain in March and the largest annual increase in a year.

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Food prices dropped 0.7%, the largest monthly decline since May 2023, while energy prices rose 2.0% in April, the most in two months.

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Excluding food and energy costs, the core PPI rose 0.5%, surpassing the 0.2% rise expected and following a 0.1% decline in March (revised lower from a 0.2% increase). Year-over-year, the core PPI increased 2.4% in April, up from the 2.1% annual gain in March and the largest annual increase since August 2023.

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Additionally, goods costs rose 0.4% in April following a 0.2% decline the month prior. Services costs, meanwhile, gained 0.6%, due to a 0.8% rise in trade costs. Transportation and warehousing costs, however, dropped 0.6% at the start of the second quarter.

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Bottom Line: Inflation continues to reverse course, moving further away from the Fed’s 2% target. After three earlier months of acceleration, Fed officials were looking to the April report as either confirmation of a temporary upward blip in the first quarter or a more lasting trend. This morning’s hotter-than-expected report, even after accounting for the downward revisions to March, offers more evidence for the latter.

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Chair Powell & Co. have been clear policy makers are willing to wait on the sidelines for as long as necessary waiting for confidence inflation is back on a sustained downward trend before engaging in rate cuts – eventually. However, with inflation proving stubborn and sticky, “eventually” increasingly appears to be a 2025 event. In other words, without noticeable improvement in price pressures for several consecutive months, there is likely little reprieve the Fed can offer in the near or even medium-term, forcing the Fed to the sidelines for potentially the entirety of the year, or at least until inflation returns to a clear disinflationary trend.

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Tomorrow, the CPI is expected to rise 0.4% in April and 3.4% year-over-year, potentially falling from the 3.5% annual gain in March. Excluding food and energy costs, the core CPI is expected to rise 0.3% in April and 3.6% on an annual basis, potentially declining from the 3.8% pace reported in March.

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Following the PPI release, this morning at 10:00 a.m. ET, Federal Reserve Chairman Jerome Powell spoke at an event organized by the Netherlands’ Foreign Bankers’ Association alongside ECB Governing Council member Klaas Knot. Powell reiterated the Fed’s ongoing message of patience as the latest inflation data showed ongoing upward pressure.?“The first quarter in the United States was notable for its lack of further progress on inflation,” Powell said. “We did not expect this to be a smooth road, but these were higher than I think anybody expected…What that has told us is that we’ll need to be patient and let restrictive policy do its work,” he added.

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Also today, the NFIB Small Business Optimism Index unexpectedly ticked higher from 88.5 to 89.7 in April, a three-month high and the first increase this year. According to the median forecast, the index was expected to fall to 88.2. At 89.7, however, this is still well below the 2019, or pre-pandemic, average of 103.0.

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In the details of the report, 26% of firms plan to increase prices, the lowest number since April 2023. Additionally, the number of firms that indicated inflation was their top concern declined from 25% to 22%, albeit still near a one-year high.

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Also tomorrow, another key report of the week, April retail sales, will be released. Retail sales rose 0.7% in March, surpassing the 0.4% gain expected, and following an upwardly revised 0.9% increase in February. Over the past 12 months, retail sales rose 4.3% in March, the most in three months. In April, retail sales are expected to rise 0.4% and 4.1% year-over-year.

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Additionally, tomorrow, March business inventories and the NAHB Housing Market Index for May will be released.

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Later in the week, on Thursday, the April housing starts and permits report will be released. Last month, starts dropped 14.7% in March and fell 4.3% year-over-year. Building permits, meanwhile, declined 4.3% in March, but rose 2.1% over the past 12 months, the weakest annual gain in five months. This month, starts are expected to rise 9.0% in April, and 6.8% on an annual basis, while permits are expected to climb 1.6% in April and increase 5.2% year-over-year.

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Also on Thursday, the May Philly Fed Business Outlook Index, April import and export price indices, and industrial production and capacity utilization reports will be released.

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Finally, wrapping up the week, on Friday, the April Leading Index will be released.

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-Lindsey Piegza, Ph.D., Chief Economist