By Tom Ozimek
After hotter-than-expected retail inflation data sent stocks plunging earlier this week, a measure of wholesale inflation has also come in higher than markets expected, fanning fears that inflationary pressures are making a comeback.
The Producer Price Index (PPI), which measures prices received by producers of goods and services, rose 0.3 percent month over month in January, according to data from the Bureau of Labor Statistics (BLS). Economists polled by Dow Jones expected a 0.1 percent rise.
That’s the biggest move up since last summer and is also a directional shift as the month-over-month PPI inflation measure fell 0.1 percent in December.
The so-called “core” measure, which strips out food and energy and is a better gauge of sticky inflationary pressures, rose 0.5 percent last month. Economists polled by Reuters expected a 0.1 percent increase.
Another core measure that excludes food, energy, and trade services shot up 0.6 percent in January, the biggest single month rise in 12 months.
The annual headline PPI inflation measure rose 0.9 percent, compared to market expectations for a 0.6 percent increase, while the annual core measure rose 2 percent, while economists expected a reading of 1.6 percent.
From the perspective of consumers, the PPI gauge is a forward-looking indicator as producer prices tend to get passed along to consumers down the road, meaning PPI tends to predict retail inflation, as measured by the Consumer Price Index (CPI).
The hotter-than-expected PPI data follows a similarly higher-than-anticipated CPI reading on Tuesday that sent stocks plunging.
Similarly, stocks wobbled after the disappointing PPI print on Friday.
‘Higher for Longer’
In response to the PPI data, many analysts expressed the view that the fight to tame inflation would take longer than expected.
“Inflation, higher for longer,” Crescat Capital partner and macro strategist Otavio Costa wrote in a post on X, while sharing a chart showing three inflationary waves of the 1970s, while hinting that, in the current time, two more even bigger waves of inflation may be coming.
Mohamed El-Erian, chief economic adviser at Allianz, wrote in a post on X that many market participants wrongly expect that the inflation battle is over.
“Per earlier posts, take this as a further indication that the ‘last mile’ of the inflation battle is more complex than many had assumed (and still assume),” he wrote.
Economist Peter Schiff dismissed the view that inflation is under control and that we’re in a steady-but-bumpy disinflationary trend.
“Once again traders are making the mistake of selling #gold and buying dollars on hotter than expected #inflation news, as the Jan. PPI ”unexpectedly“ spiked 0.3%, with the core surging by 0.6%,” economist Peter Schiff wrote in a post on X. “The #Fed can’t contain inflation.”
“Why would #inflation fall back down to 2%? Given the surge in deficit spending and consumer borrowing, as well as weakness in manufacturing, it’s far more likely that inflation rises back up to 9%. The #Fed and investors have the inflation story completely wrong,” he added in a separate post.
By contrast, the idea that inflation will rear its ugly head again in a meaningful way is not a view shared by Treasury Secretary Janet Yellen, who commented on the higher-than-expected CPI numbers earlier in the week by insisting that, “inflation, overall, is coming back down to normal levels where it’s not an issue to most people.”
‘A Little Surprised’
Raphael Bostic, president of the Federal Reserve Bank of Atlanta and voting member of the Fed’s rate-setting body, the Federal Open Market Committee (FOMC), was on Friday asked to comment on on the hotter-than-expected CPI and PPI numbers.
“I was a little surprised, but not in a big way,” he told CNBC. “Look, I think we’ve seen a lot of progress in terms of inflation. I’m expecting that through the course of 2024, it’ll be a little bumpy.”
He shared Ms. Yellen’s view that the disinflationary trend remains intact, though he believes it won’t be a smooth ride down to around the Fed’s 2 percent target.
“I think the trend will continue but the path all the way to 2 percent—I don’t think we’re going to get to than number immediately, so these sorts of numbers, they’re kind of okay and I can live with it,” he said, referring to the hotter-than-expected PPI and CPI prints.
“To me it just says we just have to be patient and let’s not get too far ahead in assuming that the job is done because there’s still work to do,” he added.
But there are signals that parts of the economy are overheating, threatening the apparent disinflationary trend. One example is higher year-ahead inflation expectations (up from 2.9 percent in January to 3.0 percent in February), according to the latest University of Michigan’s consumer sentiment survey, released on Feb. 16.
Elevated inflation expectations were also observed in the latest survey of consumer expectations, released by the New York Federal Reserve on Feb. 12. The Fed survey showed the year-ahead inflation expectations remaining unchanged at 3.0 percent, while expectations five years forward stayed at 2.5 percent. Expectations at the three-year ahead horizon retreated from 2.6 percent to 2.4 percent.
Asked about signs that consumer inflation expectations are mostly staying elevated rather than retreating, Mr. Bostic said that the data suggests the worst is over, sentiment is up, and inflationary fears are mostly receding from people’s minds.
“That means that we’re just going to take time to get back to normal,” he said.
Mr. Bostic acknowledged, however, that falling inflation is not a foregone conclusion.
“I’m grateful how far we’ve come but we have to stay vigilant because there’s a lot of risk and uncertainty still in the economy,” he said.
