Inflation: Down But Not Out

Like a battered prizefighter, inflation is hanging onto the ropes and refusing to go down for the count. So far this year, inflation reports have generally come in hotter-than-expected.

That said, we just got some good news on inflation. The U.S. Bureau of Labor Statistics (BLS) reported Thursday that the producer price index (PPI), which measures wholesale prices, rose less than expected in March.

Wall Street heaved a sigh of relief but make no mistake: inflation remains a persistent problem.

The PPI increased 0.2% for the month, less than the consensus estimate of 0.3% and not as much as the 0.6% increase in February. However, on a 12-month basis, PPI rose 2.1%, the biggest gain since April 2023.

Excluding food and energy, core PPI rose 0.2%, in line with expectations. Excluding trade services from the core level, the increase was 0.2% monthly but 2.8% from a year ago.

The PPI release comes a day after the BLS reported that the consumer price index (CPI) increased 3.5% from a year earlier, up from 3.2% in February, driven largely by the rising cost of rent and gasoline. Economists had expected 3.4%.

March’s PPI gain was propelled by services, which saw a 0.3% increase on the month. Conversely, goods prices decreased 0.1%, compared to a 1.2% increase in February (see chart).

The post-pandemic transition from demand for goods to services is continuing apace. The demand imbalance between goods and services is expected to even out over time.

At its essence, the PPI is a measure of the average change over time in the selling prices received by domestic producers for their output. It encompasses various stages of production, from raw materials to finished goods, making it a comprehensive gauge of inflationary pressures at the producer level.

While its sibling indicator, the CPI, tracks the cost of goods and services from the consumer’s perspective, the PPI illuminates the upstream forces driving those prices. As such, the PPI is a lagging indicator.

The PPI also provides insights into the profitability of businesses. When producer prices rise, firms may face higher input costs, squeezing profit margins unless they can pass on those costs to consumers. Investors closely monitor these shifts in profit margins as they directly impact companies’ bottom lines and, consequently, their stock prices.

As inflation shows renewed life, you should consider adjusting your portfolio by seeking refuge in assets traditionally considered inflation hedges, such as commodities, real estate, or stocks in sectors resilient to inflationary pressures such as utilities or consumer staples.

A headwind in the fight against inflation is rising crude oil prices. OPEC+ production cuts and economic optimism have pushed West Texas Intermediate past $85 per barrel and Brent North Sea crude past $89/bbl. The oil market is tightening, with demand on pace to outstrip supply for the rest of 2024.

There is room for further upside in oil prices, amid constrained supply, economic growth, and heightened geopolitical risks. Oil could top $100/bbl if the Israel-Hamas war takes a turn for the worse and regional players get more involved.

My view is that inflation will continue to ease this year, taking pressure off the Federal Reserve. Deflationary trends are firmly in place, as supply chain woes heal and input costs tumble. But inflation’s decline won’t be in a straight line and we’ll experience minor setbacks along the way. Hence the likelihood of persistent volatility this year.

Due to the softer PPI numbers, the main U.S. stock market indices mostly closed higher on Thursday as follows:

  • DJIA: -0.01%
  • S&P 500: +0.74%
  • NASDAQ: +1.68%
  • Russell 2000: +0.70%

Amid these uncertain investment conditions, don’t ignore cryptocurrency. That’s right…crypto.

As central banks move markets via monetary policy decisions, investors have sought refuge in decentralized assets such as Bitcoin (BTC) and Ethereum (ETH), which are perceived as immune to government manipulation and control.

Additionally, advancements in blockchain technology and decentralized finance (DeFi) have expanded the utility and functionality of cryptocurrencies, attracting a broader audience of investors and users.

Every portfolio should have exposure to crypto. But you need to be informed, to make the right choices. The experts at Investing Daily have done the homework for you.

Want to tap crypto’s massive money-making opportunities? Start receiving our FREE e-letter, Crypto Investing Daily. Click here now!

John Persinos is the editorial director of Investing Daily.

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