Producer price index data out Tuesday showed that inflation ran hotter in April, but downward revisions to earlier data assuaged concerns. Meanwhile, health care prices, the biggest input to the Federal Reserve's primary core inflation rate, moderated a bit as airfares fell. After the PPI data, the S&P 500 edged higher in morning stock market action, ahead of Wednesday's key consumer price index and retail sales reports.
PPI Data
The PPI for final demand rose 0.5% on the month and 2.2% from a year ago. Wall Street economists anticipated a 0.2% monthly rise and a 2.2% gain from a year ago, according to Econoday.
The upside surprise on the monthly data but in-line annual increase implies downward revisions to prior data. The headline PPI for March was revised to -0.1% from 0.2%.
Excluding food and energy, the PPI rose 0.3% on the month vs. 0.2% forecasts. However, March data also was revised to -0.1% from 0.2%.
Impact On Key Fed Inflation Rate
Speaking in Amsterdam, Fed chair Jerome Powell characterized the PPI data as "quite mixed," with revisions offsetting the high headline number. Yet revisions to PPI components that feed into the core PCE price index may mean the key Fed inflation rate wasn't quite as hot in the first three months of the year as previously thought.
The PPI's broad measure of health care services prices rose 0.266% on the month, unadjusted for seasonal effects. Partly due to earlier revisions, the 12-month measure of health care services inflation eased to 2.9% vs. the initially reported 3.1% in March.
Airline passenger services prices, which also feed into the PCE price index, fell 3.8% in April, providing more good news for the Fed's key inflation rate.
However, portfolio management fees, which usually rise and fall with the stock market with a slight lag, rose a surprising 3.9% in April.
Another "silver lining" in the PPI data was a 0.1% rise in auto insurance prices, the least since October, according to Ian Shepherdson, chief economist at Pantheon Macroeconomics
CPI Preview
Consumer price index data for April is expected to show a 0.3% monthly increase, lowering the 12-month headline inflation rate to 3.4%.
The core CPI, excluding food and energy, is seen rising 0.3%, moderating a bit after increases of 0.4% in each of the year's first three months. The 12-month core inflation rate is expected to dip to 3.6% from 3.8%.
Shepherdson wrote in a preview that he expects a 0.35% rise for the core CPI. Based on core PPI expectations, that should translate to a 0.26% rise for the core PCE price index, which is released near the end of the month.
The Fed "probably needs to see a couple of prints near 0.2% before it will press ahead with the first rate cut," Shepherdson wrote. In his view, it would take a substantial downside surprise for Fed rate-cut odds to shift markedly.
Fed Rate-Cut Odds
After the PPI, markets were pricing in 31% odds that the Fed's first quarter-point rate cut will come by the July 31 meeting, unchanged from before the data. Odds of a rate cut occurring by the Fed's Sept. 18 meeting ticked up to 66% from 64%.
S&P 500
The S&P 500 rose 0.15% after the PPI data. On Monday, the S&P 500 finished a hair below the flat line. Last week, the S&P 500 rallied 1.85%, powering back above its 50-day moving average.
The S&P 500 is about 0.5% below its all-time closing high on March 28.
The 10-year Treasury yield dipped two basis points to 4.46%.
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