Market Update: May 2024

PPI and CPI: April 2024 as of 5/23/2024
Traditions Wealth Advisors
Greysen Golgert/ Brien L. Smith, CFP®
Economic Analyst Intern/Chief Investment Officer

​Howdy, my name is Greysen Golgert, and I am the new Economic Analyst Intern at TWA for the 2024-25 academic year. I am currently a senior in a 3+2 program at Texas A&M, and I will graduate in May of 2025 with both my B.S. and M.S. degrees in Economics. For the next year, I will be assisting TWA and its clients by providing analysis of, and commentary on, the state of the economy as well as relevant macroeconomic trends.

On May 14th and 15th respectively, the U.S. Bureau of Labor Statistics (BLS) released the highly anticipated Producer Price Index (PPI) and Consumer Price Index (CPI) numbers for April. Before analyzing the indices and their implications, we should clarify the difference between the two. The CPI measures the prices that consumers face, and the PPI tracks the prices that producers receive for their goods. Prices received by the producer and faced by the consumer are different because sales and excise taxes are a part of the consumer’s out-of-pocket expenditure, but they are not passed on to the producer. Another important consideration is that the PPI only analyzes prices received by U.S. producers, while the CPI data includes imports in its calculation. The CPI is a more accurate inflation indicator than the PPI, which is more useful as a measure of real growth in output.

​That said, the Producer Price Index rose by 0.5% in April, bringing the year-over-year increase to 2.2%. Hikes in the prices of services account for approximately three-fourths of the total rise. A 3.9% increase in portfolio management fees as the result of a stock market rally appears to be the main reason that services inflation exceeded monthly and annual expectations. Contributors also included rebounding prices for hotel and motel rooms along with steadily rising health and medical insurance prices. Core PPI—which excludes food, energy, and trade services prices—advanced at a monthly rate of 0.4% and an annualized rate of 3.1%, which was the largest year-on-year gain since April 2023. Most of the goods inflation for the month can be attributed to a 5.4% increase in gasoline prices received by producers.

Released the following day, the CPI data did not reflect the unexpected PPI increase. After three straight months of inflation data defying expectations, the CPI was finally in line with predictions. On a year-over-year basis, CPI rose by 3.4% and Core CPI—which excludes volatile food and energy prices—only rose by 3.6%, the lowest percentage increase since 2021. Shelter and gasoline costs for consumers accounted for almost three quarters of the 0.3% monthly increase in the index. Other sectors that saw rising consumer prices besides shelter and energy include medical care, motor vehicle insurance, and apparel. The index saw notable declines in the prices for used vehicles, new vehicles, household furnishings and operations, and airline fares.

Even though the PPI data gave expectations a bit of a shock, the CPI data indicates that inflation is likely on the decline. It also probably confirms that the Fed will not need to raise rates this year. Investment markets such as the S&P 500, the Nasdaq Composite, and the Dow Jones Industrial Average rejoiced at the news, all closing on record highs this week in anticipation of rate cuts and/or a soft landing. A consistent decline in inflation without an extreme rise in unemployment over the coming months is the only way the Fed will consider cutting rates this calendar year.

A soft landing is becoming increasingly probable as we proceed through Q2 of 2024. Other key indicators that work in tandem with inflation data are beginning to paint a clearer picture of the future. The labor market is cooling as only 175,000 jobs were added in April compared to 303,000 in March. GDP growth slowed to 1.6% in Q1 of 2024 from a previous growth rate of 3.4% in Q4 of 2023, unemployment is at an encouraging 3.9%, and retail sales were unexpectedly flat in April. All of these pieces of information, even if they may seem counterintuitive, are cause for relief and cautious optimism going forward.

Sources:
https://www.bls.gov
https://www.wsj.com/economy/inflation-april-cpi-report-interest-rate-55eda190
https://www.reuters.com/markets/us/us-producer-prices-increase-more-than-expected-april-2024-05-14/