February Producer Prices and March Empire State Manufacturing Activity

INDICATOR:  February Producer Prices and March Empire State Manufacturing Activity

KEY DATA:  PPI: +0.8%; Over-Year: +10%; Goods: +2.4%; Ex-Food and Energy: +0.7%; Services: 0%/ NY Fed: -14.9 points; Orders: -12.6 points

IN A NUTSHELL: “The pressure on prices remains intense as the Fed begins its two-day rate-setting meeting.”

WHAT IT MEANS:  Will inflation ever get back to acceptable levels?  Yes, but probably not for quite a while.  Wholesale prices soared once again in February, led but jumps in food, energy, and lots of other goods.  The only thing that kept the report from being totally ugly was little change in services prices.  Over-the-year, the rise was the largest since this method of measuring producer prices was introduced. Goods costs continued to surge, which is not a good sign for consumer prices.  Some elements of wholesale services, trade in particular, did settle down.  Whether that continues to be the case is uncertain.  Regardless, the Fed is meeting, and this report cannot help support the view that going slowly is the best course of action.

The New York Federal Reserve Bank’s Empire State Manufacturing Index cratered over the past month.  The March number was the lowest since spring 2020, when the pandemic was raging and only some firms were starting to reopen.  Orders were off sharply.  Still, the headline number was not representative of the details – what a surprise.  While most other components were down a little, they were still pointing to growth.  In addition, expectations actually improved.  I suspect that will change as the Russian invasion cannot be helpful for business outlook. 

IMPLICATIONS:  Producer costs keep rising sharply, especially when it comes to goods.  The surging food and energy prices are likely to move through the economy, but that takes time, so the expectation is that producer costs will continue to rise strongly over the next few months, though maybe not as massively as they have been.  For the last 10-15 years, firms had limited pricing power.  I used to say that, outside of food and energy, the path from rising producer costs to increased consumer prices was winding and often wound up at a dead end. Thus, price increases driven by higher wholesale expenses were frequently temporary or limited.  Now, firms have pricing power and one way they can retain that power is to limit the reduction in prices as input costs decline – if or when they do.  That is likely to be the case for as long as firms can keep that going.  Meanwhile, the FOMC has started its two-day meeting.  The outcome is set and a 25-basis point rate hike should be announced at 2:00PM tomorrow.  But what the statement says about future increases, future balance sheet reductions, and the risks to growth are more important.  That means Mr. Powell’s press conference should be very interesting.  The press has really started pressuring him and issues such as how long the Fed expects inflation to remain elevated, what the Ukraine invasion may mean for policy and details on any asset sales should dominate.  We also get the latest Fed forecast charts and tables.  That should provide some thinking not just on where things are going, but also on the differences on the Committee that exist.  I expect a sizeable number of members to forecast faster rate hikes than the markets currently expect.  The Fed boxed itself in by failing to recognize the potential for inflation to remain high for an extended period.  With Ukraine raising risks to both growth and inflation, the members must fight inflation, which at least in part is being driven by factors way outside their purview, and a slowing in growth being created by faltering spending power and confidence.  The ending of government stimulus funds is not helping either.  It should be a fun meeting.