KEY DATA: PPI: +0.6%; Energy: +5.6%; Personal Consumption Ex-Food and Energy: +0.4%/ Claims: -8,000
IN A NUTSHELL: “Producer costs are rising a little faster, but not enough to cause inflation to accelerate significantly.”
WHAT IT MEANS: With the administration screaming for a rate cut, inflation pressures have become even critical to the discussion and the Fed. Producer prices surged in March, but most of that came from a jump in energy costs. Food prices rebounded, but that was after much larger declines in the previous two months. Indeed, over the year, finished consumer food costs are up less than one percent. Transportation and warehousing costs were off sharply despite the rise in energy prices. That could change. Services prices were also up moderately, meaning that there was some pressure on wholesale costs. The measure I like to watch is the index for personal consumption excluding food and energy. It rose fairly solidly in March and was up 2.4% from March 2018. While the pathway from wholesale to retail prices is hardly straight and often a dead end, if wholesale prices of core consumer goods keep rising moderately, some of that is likely to bleed in retail prices. That would point to a slow acceleration in consumer inflation.
New claims for unemployment insurance broke below the magical 200,000 number last week to hit the lowest level since October 1969. That was near the peak in the Viet Nam War when not having a job often meant winding up in the military. And to really put that number in perspective, the labor force was one-half the size that it is currently. In other words, the labor market remains incredibly tight. MARKETS AND FED POLICY IMPLICATIONS:The recent consumer and producer price data don’t point to any major acceleration or deceleration in inflation. Therefore, the Fed will feel no economic pressure to do anything. While that may be good news for Chair Powell’s rate policy, it further exposes the Fed to the slings and arrows of outrageous politicians. Apparently, applying political pressure on the Fed has become an acceptable form of behavior. That includes not just speaking out about what Fed policy should be but also potentially nominating people who are perceived to be being willing to impose political beliefs on the Fed. Keep in mind; if those currently politicizing Fed policy get away with it now, it opens the door for all future politicians to politicize the Fed. And if they are successful, the markets will not be able to determine the true purpose of Fed policy, reducing its credibility and effectiveness. So I ask you, do you really want politicians running both monetary and fiscal policy? We have seen how well Washington does with budgets and fiscal policy; do we really want that same approach to determine interest rates and liquidity? I understand that investors and politicians all want the lowest rates and the fastest growth, regardless of the longer-term implications. But that is not why we have a Fed. Its purpose is not to create the maximum growth rate for the current group of politicians to run on but to look out over the future and minimize the ups and downs so longer-run growth can be maximized. If that means raising rates and reducing balance sheets, so be it.