KEY DATA: PPI (Final Demand): +0.1%; Ex-Food and Energy: +0.2%; Goods: 0%; Services: +0.1%

IN A NUTSHELL: “Despite the modest increase in wholesale costs, the inexorable rise in inflation remains inexorable.”

WHAT IT MEANS: Inflation pressures are building; there is little doubt about that. What is unclear is how much will price increases accelerate. Costs had been rising fairly sharply at the wholesale level, but that was not the case in April. A large decline in food prices coupled with a modest gain in energy helped limit the rise in producer prices to the smallest increase since December. There was minimal pricing pressure on both goods and services and even excluding the more volatile food and energy, costs rose only moderately. Over the year, the gains in both the headline and core indices decelerated, but remained in the 2.5% range, so we cannot say that inflation pressures have disappeared. Looking at the details, there were few outliers. Prices of vegetables and eggs fell sharply, a major factor in the large drop in food. Otherwise, most of the individual categories posted modest to moderate declines or increases, the majority being declines.

Looking into the future, the April report is not likely to become the norm. Intermediate level producer costs rose sharply for food, energy and core (non-food and energy) measures. That was the case at the crude product level, though food costs were down. Basically, there is building pressure in the pipeline.

MARKETS AND FED POLICY IMPLICATIONS: The inflation pressures we see in all the consumer indices are real. With oil prices above $70/barrel and the ending of the Iran agreement likely to keep prices up, it is hard to see how inflation will moderate anytime soon. The Fed looks at the headline number now, so energy matters. I have made the argument to anyone who will listen that over time, it is the entirety of retail price increases that matter to households. The headline increases in the Consumer Price Index (CPI) and Personal Consumption Expenditure deflator (PCE) have been persistently above the core increases and that is what consumers pay. The Fed has moved back toward the top line number, which makes sense. Thus, there is every good reason for the FOMC to continue to normalize both rates and the Fed’s balance sheet. Quantitative tightening will continue and is scheduled to accelerate. Rate hikes are not likely to stop unless there is a major crisis. Investors need to factor that into their thinking. Of course, with all the political issues swirling around Washington, lots of fundamental economic considerations are being pushed to the sidelines.