KEY DATA: PPI: +0.3%; Less Food and Energy: +0.3%; Goods (Over-Year): +3.2%; Services (Over-Year): +2.9%

IN A NUTSHELL: “Cost pressures are building at the wholesale level, but it is not clear if they will actually be passed through to consumers.”

WHAT IT MEANS: As we pin ball along the trade war path, we still need to keep our eyes on the fundamentals and inflation is key, especially for the Fed. If price pressures build, the Fed will have to move to keep them from accelerating too sharply. So, what is going on in the real world of economic data? If you believe the March Producer Price Index, costs are rising for firms. Both goods and services prices increased solidly and over the year, the gains keep accelerating. That is the case despite a backing down of energy costs. Instead, food prices jumped, with gains pretty much across the board. The same can be said when you look at the details of the non-food, non-energy categories. There are many more increases than declines, indicating that the costs of finished goods is likely to rise faster, though how much of an acceleration we will se is simply unclear.

Looking down the road, you see the same trend. Food costs are reversing and starting to rise and non-food and energy intermediate goods and services prices are showing signs of picking up steam as well. If energy prices stabilize, or as I expect, start another upward pattern, wholesale cost pressures could become a problem for retailers.

MARKETS AND FED POLICY IMPLICATIONS: There is little question that inflationary pressures are building in the economy. Delivery lead times are rising, as we have seen in the recent Institute for Supply Management’s indices. In manufacturing, the report noted that “This is the 18th straight month of slowing supplier deliveries, and that continues to be a constraint to production growth. Lead-time extensions in many areas, including steel; supplier labor shortages; and transportation delays will continue to restrict production output for the foreseeable future”. The strong economy comes with its own issues and they are starting to show up. But as I remark almost every time this report is released, the path from wholesale costs to consumer prices is hardly straight and often dead-ends. So don’t get too worried, yet. The Fed members, though, will have to consider these trends as it is likely that consumer inflation will be exceeding its 2% target soon and for an extended period. As for investors, it’s still all about trade and China’s President Xi Jinping’s comments the he intends to open up his country to more imports was good news. Of course, the cynic in me remembers that the Chinese have used, for decades, promises of action to forestall actually taking action, so we have to see real changes before we celebrate. Investors, though, have reason to relax a little, which means in this market, surge forward.