Inflation Angst Returns With Hot January PPI

Inflation Angst Returns With Hot January PPI

• After a couple days of recouping losses off the hot CPI report we’re back wringing hands over the specter of higher inflation after today’s PPI report which, just like CPI, surprised to the upside. The implication of a hot PPI is that it will lead to the same for the Fed’s preferred inflation measure PCE due at month-end.  For now, yields are holding just below the highs set on Tuesday.  Presently, the 10yr Treasury is yielding 4.30% while the 2yr Treasury is yielding 4.66%.

• Just when investors convinced themselves that the hot CPI numbers were an aberration, today’s PPI numbers have resurrected the inflation angst yet again. Final Demand PPI for January increased 0.3% vs. 0.1% expected and -0.2% in December. The January increase was the largest since Sept. 2023. Final Demand ex-food, energy, and trade rose 0.6%, well above the 0.1% expected and 0.2% in  December. It’s the highest result since last January (see graph below), which once again begs the question whether it is seasonal issues particular to January, or a more serious trend change. Generally speaking, the culprit, just like with CPI, was the services-side which increased 0.6% while the goods-side decreased -0.2%.

• While PPI may be suffering some seasonal issues akin to CPI, it does bring out the specter of a higher PCE at month-end as several PCE categories flow from PPI. There was some comfort after the CPI report that PCE, which has tended to track below CPI for various reasons, the biggest of which is less weighting of OER, would not repeat the upside inflation surprise. But with the today’s numbers that hope may be dashed, and that will keep the market anxious until the Fed’s preferred inflation measure is released.

• The Fed speak continued yesterday with the most direct comments from Atlanta Fed President Raphael Bostic who was a bit more concerned about the CPI print than was Austion Goolsbee the day before. In any event, today’s hot wholesale inflation numbers will only reinforce the patient pause approach as we wait for February reports to either confirm a new trend, or that January was indeed a one-off.

• We should note too that yesterday’s January retail sales numbers were decidedly below expectations with weather cited as the primary culprit. Soft industrial production and housing starts and permits also missed with adverse weather being cited as a primary reason. That may be so, but the weather didn’t seem to slow the job market which popped above expectations in January. So, a lot of cross-currents are sowing confusion. Just like with the inflation indices, investors will have to wait for February results to assess whether January was a one-off, or was it a trend changer? Right now, we’re on the side of January being a one-off, but we shall see.

• One more inflation-related number is due later this morning with the preliminary read on the University of Michigan’s Sentiment Survey for February. While sentiment is expected edge higher from 79.0 to 80.0 the inflation expectations will get the most attention. The 1yr inflation expectation is forecasted to be unchanged at 2.9% while the longer run 5-10yr expectation is forecasted to dip to 2.8% from 2.9%. Any upside surprise here will only put more pressure on Treasuries as the Fed does not want those expectations moving higher.

PPI Ex-Food, Energy, Trade – Highest Since Jan. 2023