Merk Investments: April PPI

The producer price index for the month of April increased 0.2% m/m and 6.5% y/y , while the core came in above expectations at 0.4% m/m and 3.0% y/y. Ex-food the index rose 0.2% m/m and 6.9% y/y. Ex-energy the PPI increased 0.3% and 3.6% over that same period. Consumer goods were up 0.1% m/m and 7.7% y/y. Inside the major data categories, residential electricity increased 1.2%, residential gas was up 5.4%, prescriptions 0.7% and women’s apparel 0.1%. According to the Department of Labor, gasoline posted a -4.6% decline for the month of April. Intermediates rose 0.9% m/m and 10.5% y/y. Ex-food and energy prices increased 1.2% m/m and 5.8% y/y.  Ex-food was up 1.0% m/m and ex energy climbed 1.1%.

We have been making the case for some time that the rise in the cost of basic inputs has been slowly bleeding through to the core. We saw direct evidence of that this morning when the core arrived well above market expectations and saw manufacturing materials, durables, non-durables and construction materials all see double digit increases on a monthly basis.

Seasonal adjustments in the energy component, similar to what occurred in the April CPI, was the primary catalyst behind the below expectations 0.2% m/m and 6.5% y/y. Thus, according to the Department of Labor the cost of gasoline fell -4.6%. Once one gets past the derisive laughter, a more sobering reality sets in. The increase in the cost of fuel may have been a bit less intense in the sampling period than has been the case in past years and stimulated a seasonal adjustment that indicated lower costs on a month over month basis.

However, what the bureaucracy gives this month, they will take away in future reports. The seasonal adjustment will be corrected and what we think is a real increase of 6.5% in the cost of gasoline causes an upward revision in the headline data. Firms are facing significant pressures on a headline, core and intermediate basis. Moreover, any hope of a dampening of core pressures that have been making the rounds in the market over the last few days should be extinguished with this report. Given the razor thin profit margins that firms now face, even as the economy slows, they will have little choice but to pass along the price increases that have been building for quite some time on to consumers. The increase in the core rates, serious pressure in the producer pipeline and the price increases that will begin to hit an already stressed consumer in the near term should give the Fed a significant bout of indigestion. 

Joseph Brusuelas
Merk Investments
Chief Economist/VP Global Strategy

This report was prepared by Merk Investments LLC, and reflects the current opinion of the author.  It is based upon sources and data believed to be accurate and reliable.  Opinions and forward looking statements expressed are subject to change without notice.  This information does not constitute a solicitation or an offer to buy or sell any investment product, nor provide investment advice. Merk Investments does not own any of the stocks mentioned; this is not an offer to buy or sell any security mentioned.