In a rather peculiar twist, the US economy seems to be taking a breather, exhibiting signs of inflationary moderation and a simultaneous uptick in jobless claims. The latest Producer Price Index (PPI) data shows an annual increase of 2.3% for April – the most leisurely pace since the early days of 2021, reflecting the fruits of easing commodity prices and improving supply chains. However, don’t be fooled by the superficial tranquility.
From the Federal Reserve’s perspective, these might be the numbers that tip the balance in favor of a pause in interest rate hikes in the upcoming meeting. But, as we delve deeper, the persistent inflationary pressures cannot be ignored. Despite the apparent cooling in the consumer price index, the underlying current of inflation continues to be strong, driven in part by the ongoing tightness in the labor market, which is forcing wages upwards.
A sudden spike in jobless claims to levels not seen since October 2021, might indicate some softening in the labor market, albeit against a backdrop of low unemployment. Interestingly, this rise is primarily attributed to one state – Massachusetts. It’s a cautionary tale that such geographic concentrated disruptions can ripple out to the broader economy.
Underneath the PPI headline, we find that services are the main culprits, responsible for 80% of the monthly increase. This includes an array of sectors from portfolio management and food wholesaling to health care costs.
Looking at the pipeline of production, the costs of processed goods for intermediate demand have actually dropped by 0.4%, thanks to lower energy and food costs. But, excluding these elements, we witness the highest rise in nearly a year.
The Fed, having ventured into the territory of 5% interest rates for the first time since 2007, will undoubtedly keep a keen eye on these service prices. The broader question of whether these inflationary pressures are genuinely dissipating remains up for debate.
Uncertainty is the name of the game in these times, and perhaps the best move for the Fed at the moment is to pause and assess the lay of the land before taking the next step. After all, in the words of the president of Inflation Insights LLC, Omair Sharif, the Fed should “just get a sense of where things are headed.”
