Inflation Indicators Warming Up, Production Cooler in April, Claims Good
- The April Consumer Price Index increased by a strong 0.3 percent, with broad-based gains.
- The April Core CPI increased by 0.2 percent, and was up 1.8 percent over 12 months.
- The Producer Price Index for Final Demand increased by 0.6 percent in April.
- The Core PPI for Final Demand Goods gained 0.3 percent in April.
- Industrial Production dropped by 0.6 percent in April, with a big drag from utilities.
- Initial Claims for Unemployment Insurance fell by 24,000 to hit 297,000 for the week ending May 10.
Inflation metrics warmed up in April despite a drop in consumer energy prices. Looking upstream first, the PPI for final demand gained a strong 0.6 percent in April after increasing by 0.5 percent in March. Upstream energy prices were flat. Wholesale food prices gained a noticeable 2.7 percent for the month, pushed up by drought conditions in California, now for the third consecutive year in some areas. There may be a weather-related component to the increase in non-food prices. Shipping bottlenecks left over from the severe winter, combined with bottlenecks in rail transport, have resulted in very high demand for trucking services. Since almost all goods require transportation, a shift away from rail and toward trucking is putting upward pressure on the prices of many goods, both at the wholesale level and at the retail level. The Consumer Price Index for April was up more than expected, by 0.3 percent. Energy prices at the consumer level gained 0.3 percent. Food prices were up 0.4 percent for the third month in a row. Increasing house prices and rents are having an effect. The index for shelter was up 0.2 percent in April. The core CPI (less food and energy) was up 0.2 percent, and is now up 1.8 percent on a year-over-year basis. While some of the push to CPI may be viewed as temporary and not primarily due to overall demand-pull effects, some, mainly housing, is going to be around for a while. If we add to the picture rapidly declining unemployment rates in some areas, upside pressure on average hourly earnings and weak productivity growth, we start to see some potential for stronger inflation as the U.S. economy accelerates this year.
Industrial production in April dipped by 0.6 percent as utility output fell by 5.3 percent, clearly weather-related. However, most manufacturing industries were weak as well. Overall manufacturing declined by 0.4 percent in April, after solid gains in February and March. Durable goods output fell by 0.3 percent as machinery output dropped by 1.6 percent. Motor vehicles and parts output gained a small 0.1 percent as auto assemblies increased slightly. Nondurables output fell 0.4 percent with losses spread over a variety of industries. Overall capacity utilization ticked down to 78.6 percent. The best economic news this morning came from unemployment insurance claims. New UI claims fell by 24,000 to hit a level of 297,000, the lowest level since May 2007. Anything below 300,000 is a strong number, so labor market conditions are improving steadily. Continuing claims fell by 9,000 to hit 2,667,000 for the week ending May 3.
Market Reaction: Equity markets are down. Treasury yields are down. The 10-Year T-bond yield is down to 2.48 percent. NYMEX crude oil is down to $101.68/barrel. Natural gas futures down to $4.35/mmbtu.
For a PDF version of this Comerica Economic Alert click here: CPI 05-15-14.