Weekly Economic Trends and Indicators

The Headlines:

Multiple inflation indicators for the month of March reflected the influence of higher oil and gasoline prices due to the military action in Iran affecting the Strait of Hormuz. According to the Bureau of Labor Statistics, the producer price index (PPI) increased 0.5%. The energy component of the PPI increased 8.5% while the core PPI (excluding food and energy) only increased by a modest 0.2%. The consumer price index (CPI) was up by 0.9%. The energy component of the CPI increased 10.9% while the core CPI increased 0.2%.

The personal consumption expenditure (PCE) price index was not yet available for March. However, the PCE price index increased 0.4% in February, before the increase in oil prices.

The Details:

Several categories of goods have seen prices rise faster over the last year compared to previous trends. Household furnishings, apparel, tools, photographic equipment, and toys are among the categories with the highest inflation. Some of this occurred last year in the months immediately following the tariffs. While inflation has cooled for items such as household furnishings and photographic equipment, women’s apparel prices jumped 1.9% in March following on the heels of a 2.2% increase in February. Prices of tools, hardware and supplies were up 1.4% in March. Toy prices rose 2.3% in March.

It is too early to say how much the rise in oil prices will add to goods price inflation going forward through the rest of this year. One of the first places that might show up is in the transportation and warehousing component of the PPI.

The Context:

The price increases in March pushed the 12-month inflation rate in the CPI back above 3% to 3.3%. This complicates the picture for monetary policy. Late last year and early this year, some market observers had been expecting lower interest rates from the Fed by now due to what appeared to be a slowing labor market. President Trump has repeatedly called for lower rates, and his choice for the next Fed Chair, Kevin Warsh, has made the case for lower rates as well. Yet in his confirmation hearing on Tuesday, Warsh testified that he has made no promises to the President to lower rates.

Now that the labor market appears to be stabilizing, the balance of risks is tipping more towards inflation with the increase in oil prices. Many economists argue that this would be the wrong time to cut interest rates as it could further fuel the supply side inflation coming from oil.

Is there still a case to be made for lower rates? In order to argue persuasively for lower rates, there are two assumptions that must be made. First, the oil shock must be temporary, which is dependent on negotiations to open the Strait of Hormuz and reach a broader peace agreement. Second, there needs to be enough of a productivity increase to contain the demand side inflationary pressure that seems to be building. Kevin Warsh has essentially argued that the second assumption is true. However, many remain unconvinced. Furthermore, no one can know at this point how long the oil price shock will last. These are the roadblocks standing in the way of further interest rate cuts. If Warsh is confirmed by the Senate, he will preside over a divided Federal Open Market Committee with several members who have publicly expressed inflation concerns even before the oil price shock as well as at least one member who is sure to vote for a rate cut. Most observers expect that it will be very difficult to convince the committee to cut the policy rate with the 12-month inflation rate still above 3% when their target is 2%. In fact, CME FedWatch estimates at least a 50% probability that the fed funds rate is still at its current level for each Fed meeting all the way to June 2027. It is shaping up to be a showdown between the inflation hawks who do not want to take any chances that oil price increases could spark a new round of inflation and the inflation doves who believe that AI-driven productivity increases will offset price pressures. The market believes that this will continue with no clear winner until something in the economy decidedly breaks to one side or the other.

Next week: International update