After yesterday's jump in US consumer prices, market attention focused today on PPI inflation data. Before today's publication, many investors feared that another strong reading of inflation data could deepen yesterday's declines as the Fed would have more reasons to tighten monetary policy sooner and more abruptly than expected. Indeed, the reading showed a strong rise in inflation, but this did not cause panic in the markets. On the contrary, the main indices have risen and are continuing to recover yesterday's losses. Today's reading showed that producer prices increased 0.6 % from in April, following a 1% increase in March and well above analysts' expectations of a 0.3 % increase. The highest increases are due to a 0.6 % rise in services prices, namely portfolio management; airline passenger services; food retailing; fuels and lubricants retailing; physician care; and hardware, building materials, and supplies retailing. The index for final demand products also increased 0.6%, namely steel mill products; beef and veal; pork; residential natural gas; plastic resins and materials; and dairy products. Year over year, the PPI spiked 6.2%, the largest increase since the agency started tracking the data in 2010.
Today's PPI shows that inflation pressures keep building up. Source: Bloomberg
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Also ex-food, energy, and trade, producer prices jumped to 4.6% YoY, the most on record. Source: Bloomberg
Historically rising producer prices have not always led to a sharp rise in inflation. In normal times price increases can be caused by various factors and do not necessarily translate into higher wholesale costs being passed on to customers. This may be one of the reasons why today we did not observe further declines of stock indices.
However these are not normal times. Many investors fear that if high prices persist for a long time, it may lower companies' margins and erode profits. Such a scenario could result in companies transferring an even greater part of these costs to consumers, which would also force the central bank to start limiting its ultra-loose monetary policy.
