All these incentives cause inflation to rise

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The question remains with everyone: is inflation a temporary sugar surge due to incentives or is it here to stay?

The US Producer Price Index, which measures sales prices for goods and services, rose 1% in March on a seasonally adjusted basis, the Bureau of Labor Statistics announced Friday. That was a stronger increase than in February and larger than economists had expected.

Finished products prices have risen most sharply since the government started pursuing that particular measure in 2009.

The main driver was a sharp rise of 8.8% in gasoline prices.

Year-on-year producer price inflation was 4.2%, the largest increase since September 2011, almost a decade ago.

“While it is a surprise to the consensus and our forecasts, it is not that unexpected to see much stronger commodity prices,” given high demand and global supply chain problems as economies reopen, said Citi C. economist Andrew Hollenhorst in a note to customers.

Inflation has become the bogeyman of the moment. Investors are concerned that as the economy fully reopens, sudden price increases fueled by pent-up consumer demand could force the Federal Reserve to rethink its monetary policy. The central bank has dismissed these concerns, saying that price spikes will only be temporary as the economy returns to normal.

Despite those reassurances, the scenario that Wall Street is concerned about is a sudden rise in interest rates to counter the sudden high inflation.

While these concerns still gripped the stock market firmly a few weeks ago, investors were calmer Friday.

The yield on 10-year government bonds, an indicator of interest rate expectations, rose only slightly by 1.64%. That was enough to send the techies Nasdaq Composite COMP index slightly lower. But the broader stock market remained in record territory, with the S&P 500 SPX gain enough ground to be on track for a new record.
“But with supply chain bottlenecks and the broad reopening of the economy fueling earnings, the Fed will likely stick to its policy pending whether the recent rebound will continue beyond this year.” Wells Fargo WELLS FARGO economist Sarah House.

In other words, don’t worry about out of control prices just yet.

Inflation is a complex calculation because it is a process and not a single economic event. To make things even more confusing, there are several different inflation indicators, of which PPI is just one.

Another is CPI, or consumer price inflation, which measures changes in price for a different set of goods and services. The CPI data for March is expected next Tuesday and economists surveyed by Refinitiv expect an increase of 0.5%.

There is also an index for personal consumption expenditure, often referred to as the Fed’s preferred measure of inflation. The PCE index for March is expected at the end of the month.

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