INDICATOR: February Producer Price Index
KEY DATA: PPI: -0.1%; Goods: +0.4%; Services: -0.3%
IN A NUTSHELL: "With food and energy costs rising sharply once again, consumers will be feeling the pain soon and that is concern for consumption, even if it is not necessarily an inflation issue."
WHAT IT MEANS: The Fed is tapering, largely because some members are terrified of inflation and future structural issues. Well, on the inflation front, there still is little to fear except fear itself - at least for now. Producer final goods prices were down in February but the headline number does hide some real concerns. Food costs surged once again and energy was also up sharply. The bitter cold weather in so many areas, coupled with the resultant higher energy costs will sap spending power from households who have had no increase in their wages. Add to that the reappearance of food inflation and that does not bode well for spending. On the other hand, services costs, such as trade, transportation and wholesaling, were off. Looking forward, intermediate costs, especially for processed goods, were up solidly throughout the different stages of production. That seems to indicate some pressures are building.
The measures of consumer attitudes seem to be separating. Bloomberg's weekly gauge is showing some improving confidence but the University of Michigan's mid-month measure was down from the February level. The Michigan decline was driven by a sharp reduction in expectations. Meanwhile, perceptions of current conditions improved. I suspect that the recent disappointing job numbers may be affecting thinking about the future. That could change with one really big payroll rise and I think that is coming.
MARKETS AND FED POLICY IMPLICATIONS: When analyzing producer costs, it is important to remember that the pathway from wholesale to retail prices increases is never straight or clear. Pricing power matters and that is why there is little to fear from wholesale cost gains except in those categories, such as food and energy, where the price increases get more readily passed through. Indeed, even the inflation hawks at the Fed have been quieting their shrieks lately. As for the markets, investors are having trouble looking past Russia and Crimea. China's softening economy is not making things any better. Thus, the world is playing a central role in the near-term decision-making. Longer-term, it will be about consumer spending and that will once again bring the focus of attention back to wages and confidence. But for now, investors will do what investors do when uncertainty strikes.