Producer prices decreased in March by 0.1% after a 0.2% decrease in February. This was worse than the expected increase of 0.2%. Meanwhile, there was also a 0.1% drop in the seasonally adjusted annual change, after being unchanged in February. The core rate was 0.1% lower (first decline since October) after a flat reading in the previous month and was below expectations for a 0.1% increase. Meanwhile, service prices (63.5% weighting in the index) were 0.2% lower and goods prices (34.7% weighting) rose by 0.2%, which was the first increase following eight consecutive monthly declines.
Regarding the -0.6% goods reading, most of this decline can be traced to the 1.8% rise in final demand for energy. Whereas, the fall in services prices was related to the decline in margins for final demand trade services, which accounted for 80% of the decline in services, . With regard to pipeline inflation, intermediate processed goods excluding food and energy were 0.1% lower, while unprocessed core goods prices were 2.1% higher. The 12-month changes in the core processed intermediate goods and unprocessed goods were -2.9% and -9.9%, respectively—still showing significant downward pricing pressure.
Wholesale pricing pressures remain on the whole weak. However, as we proceed through this year the base effect from lower commodity prices gradually falls out and headline prices will (barring some exogenous shock) start to move back up to headline rates of inflation. The question is really, how much higher do those headline and core rates rise. Our feeling is that they are likely to remain relatively muted, with consumer prices (using the Fed’s PCE deflator) still struggling to reach its inflation target in 2016. For producer prices, the difficulty remains the stronger dollar, the ongoing high levels of inventories, commodity producers still unable to reduce production capacity, and little in the way of end-demand now that China’s growth is moderating and they are transitioning toward a more consumer-driven demand growth model. For the Fed, this means it should still not be in any hurry to push up interest rates in the near term.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.