Pipeline Restored; Producer Price Pressures Rise

Colonial Pipeline resumed fuel shipments late yesterday, although, according to reports, it could be some time before supply returns to normal. In the meantime, President Biden waived rules on ships to allow foreign tankers to ferry gasoline to emptied stations, but industry insiders suggest it could take up to a week to cover the supply gap.

President Biden also signed an executive order designed to strengthen cybersecurity. Recall, the U.S. government declared a state of emergency to keep fuel supply lines open following the shutdown of Colonial Pipeline on Friday. According to reports, hackers stole almost 100 gigabytes of data from Colonial Pipeline's networks before locking its computers with ransomware and demanding payment.

The 5,500-mile conduit carries 2.5M barrels a day to the East Coast, or 45% of its supply of diesel, gasoline and jet fuel. According to Bloomberg News, aside from connecting refineries to more than 50M people, the pipeline network serves major U.S. airports, including Atlanta's Hartsfield-Jackson.

Crude prices rose 1.2% yesterday to close at $66.08 a barrel. Today, crude prices are down 2.7%, trading at $64.31 a barrel as of 9:24 a.m. ET.

Equities closed in the red yesterday with the Dow down 681.5 points, or 1.99%, while the S&P 500 fell 2.14% and the Nasdaq Composite declined 2.67%.

Today, however, equities are up 0.4%, with the Dow trading at 33,725.92 as of 9:33 a.m. ET.

Yesterday, the CPI jumped 0.8% in April, surpassing the 0.2% rise expected, according to Bloomberg, and the largest increase since June 2009. Year-over-year, consumer prices rose 4.2%, the most since September 2008.

Food prices rose 0.4%, while energy prices declined 0.1% in April, following a 5.0% gain in March. Excluding food and energy costs, the core CPI rose 0.9%, more than the 0.3% gain expected, according to Bloomberg, and the largest increase since April 1982. Year-over-year, the core CPI increased 3.0%, the most since January 1996.

In the details, commodities prices rose 1.1%, and medical care prices increased 0.1%. Also, transportation prices rose 2.5% and recreation prices gained 0.9% in April, following a 0.4% gain the month prior. Also, housing prices increased 0.5%, thanks to a 0.2% rise in the OER. Additionally, education and communication costs rose 0.3%, and apparel prices also increased 0.3% in April, a three-month high.

This morning, the PPI rose 0.6% in April, double the 0.3% gain expected, according to Bloomberg, and following a 1.0% gain the month prior. Year-over-year, producer prices jumped 6.2% in April, the largest gain on records dating back to 2010.

Food prices rose 2.1% following a 0.5% gain in March, while energy prices declined 2.4% at the start of the second quarter. Excluding food and energy costs, the core PPI rose 0.7%, more than the 0.4% gain expected, and following a similar rise in March. Year-over-year, the core PPI increased 4.1%, also the largest gain on record.

Additionally, services costs rose 0.6%, thanks to a 0.5% gain in trade costs, a 2.1% increase in transportation and warehousing costs, and a 0.5% rise in other costs.

Bottom Line: Year-over-year, consumer prices and producer prices rose the most since 2008 and the most on record, respectively. While this is a startling rise on a nominal level, the recent backup in prices primarily reflects reflation, a scenario that Fed officials have gone to great lengths to inform or warn the market about.

Remember, it was this time last year that the country was going into lockdown – tens of millions of jobs were lost within a matter of weeks, and consumption and production were shuttered virtually overnight, undermining market activity and price sustainability. As a result, headline costs fell well below 1% in April of last year with energy costs alone down nearly 20%.

Now, as the lower lows or the lower data points from late spring/early summer last year fall out of this year’s inflation equation, topline prices will – and are – moving higher. 

Fed officials, however, have been clear they anticipate these base effects will simply settle down as the economy moves past the wild pandemic-related cost swings, and pressure from supply bottlenecks and a change in American spending habits back to pre-pandemic trends normalizes. Part of this is simply the nature of living through a global pandemic, however, the recent uptick in prices does complicate the current policy environment as Fed officials struggle to sort through the volatility and decipher temporary swings versus lasting trends. Only the latter will result in a policy adjustment. 

Of course, with the labor market uneven, should inflation persist higher, the Fed will not be able to keep rates low to stimulate growth and raise rates to control inflation. We look further at these potential conflicting policy directives in this week’s Economic Insight which will be published tomorrow. 

At least for now, the market seems to be somewhat buying the Fed’s notion of "inflation dismissal." The 10-year yield is down 1bp, currently trading at 1.68% as of 9:28 a.m. ET, down from a recent peak of 1.74% on March 31st, although up from a March 2nd low of 1.39%. 

Speaking of supply chain issues, vessels and barges backed up on the Mississippi River after a crack was found in a highway bridge yesterday, as the WSJ reports. According to reports, there are 12 north-bound vessels pushing 157 barges and 16 southbound vessels pushing 254 barges waiting.

The River is a key transportation line for everything from grains to fuel, and the main portal for crop exports. At this point, there is no official timeline for reopening the River with analysts warning a sustained outage may disrupt shipments from the Gulf and crop markets.

Also this morning, initial jobless claims fell 34k from 507k, revised up from 498k, to 473k in the week ending May 8, the second consecutive week of a decline and a new pandemic low. According to Bloomberg, jobless claims were expected to decline to 490k. 

Continuing claims, however, or the total number of Americans claiming ongoing unemployment benefits, fell from 3.700M to 3.655M in the week ending May 1.

-Lindsey Piegza, Ph.D., Chief Economist