Preview of today's US PPI numbers

Today we get the second component of the US inflation outlook, namely the PPI numbers. Yesterday’s CPI release painted something of a mixed picture. On the one hand there was a welcome fall in both the annual and monthly headline rates, which will have boosted hopes that the US economy has firmly entered a disinflation cycle. However, the disappointment was found in the core rates, the annual rate ticking up by 0.1% while the monthly rate, despite falling 0.1%, still posted an increase of 0.4% which is far from compatible with a 2% annual CPI target. Similarly, the rate of increase in core services CPI ex-rents – a current obsession of the Fed – similarly dipped to just 0.4% from 0.5% in February, which over Q1 implies an annualised growth rate of 4.8%. This is an increase from the 4.3% annualised rate seen in February. The painstakingly slow pace with which core inflation is falling will be of concern to the Fed, and even though the moderation now being seen in wages growth will increase downwards pressure on the numbers – labour costs are typically the most important cost component for services firms – overall, yesterday’s numbers look insufficient in themselves to prevent the ’hawks’ on the FOMC from securing a further 25bps rise in interest rates at next month’s meeting.

The final piece of the puzzle that could secure that interest rate rise may well come today, with the PPI numbers widely expected to show that the surprise fall seen in February’s readings has reversed. A monthly core reading of 0.2% is widely expected, while the monthly core reading ex-trade is forecast to print slightly higher at 0.3%. These figures would suggest annualised readings of 3.4% and 4.2% respectively, down from February’s annualised numbers but still probably uncomfortably high for the FOMC’s ‘hawks’. However, a key component of the PPI readings are wholesale and retail margins. These are measured in the ‘trade services’ index and account for approximately 22% of the core PPI number. Gross margins increased by around 20% during the covid pandemic as demand for goods surged when the services sector was largely shut down, and on the back of the widespread supply chain disruptions that were experienced. These are now falling rapidly again, with only a 3.6% year-on-year increase seen in February: the possibility that we move into negative territory in March cannot be ruled out. Such an outcome would almost certainly see core PPI print below consensus.

Combining today’s PPI numbers with yesterday’s CPI figures will allow forecasts for the March PCE deflator to be made, the overall inflation reading that matters most to the Fed, and which will allow forecasts for May’s FOMC meeting to be largely finalised. But as noted above, with the CPI numbers already suggesting a further 25bps hike in May is likely, the strength of downside surprise needed in the PPI numbers today to change this outlook looks simply too much. Accordingly, anticipating at least one more interest rate rise from the Fed looks the most sensible position to adopt.