Kristian Rouz – US wholesale prices dropped in March for the first time in seven months, pointing to a likely retreat in factory gate prices and putting downward pressure on US inflation and overall growth. Nonetheless, a broader prices index suggested that inflation is still sustainable, despite the faltering prices in energy and services.
According to a report by the Labor Department, the US producer price index slid 0.1 percent in March for the first time since August 2016, after having gained 0.3 percent the previous month. However, year-on-year producer prices gained 2.3 percent, their five-year highest, supporting the view of broader accelerating inflation. The monthly dynamics are pointing at a moderation in short-term gains in prices, which might contain economic growth in 2Q17.
Energy prices dropped 2.9 percent, with petrol costs having declined a whopping 8.3 percent. Oil has advanced in April, however, meaning the disinflationary pressures will ease this month. Broader consumer inflation is currently overshooting the Federal Reserve’s 2-percent target, opening an opportunity for another hike in base borrowing costs, likely due in the summer.
The core prices index rose by 1.6 percent year-on-year in March, which is below the Fed’s target. This contradiction in macro fundamentals might render the central bank more cautious when assessing their next policy steps in the coming months.
Another factor contributing to the slide in producer prices is the deterioration in the credit market situation. Loan services declined by 4.1 percent in March, dragging the overall demand down. Many US households and businesses are overleveraged, which, in the environment of gradual tightening of monetary conditions, limits their spending capabilities.
Clothing, shoes and accessories; health, beauty and optical goods; truck transportation; securities brokerages, and investment consulting have all moved lower amidst the unfavorable credit conditions. On the contrary, machinery, furnace and parts; insurance services; and food and beverage posted gains in March.
The indication of the inflationary momentum slowing in March is a warning to investors, as the numbers outlined above will be passed on to consumers shortly, affecting the demand-side of the economy in the near term.
The March numbers have also demonstrated a stabilizing demand for industrial goods, pointing to the ongoing realignment in the economy, which will likely produce a re-industrialization drive in the US. However, the deterioration in the credit market is so bad that even the “full-employment” labor market situation does little to support consumer demand.
As US jobless claims dropped by 1,000 to 234,000 in the first week of April, the Federal Reserve is taking into account the “full-employment” labor market. The main point of the debate will be whether broader inflation, which is above the targeted 2 percent, becomes the point of reference for upcoming policy decisions, or whether the core prices index, currently at 1.6 percent year-over-year, prevent the Fed from raising rates.