Congratulations to those who want higher inflation. You’ve got it. The US reported a 1% rise in producer prices for March on Friday, double the consensus forecast of economists. Prices have increased by 4.2% in the past year, while commodity prices have increased by 7%.
The year-over-year increase is higher in part due to the low pandemic numbers from 2020. The recent acceleration is also linked to restrictions on the supply of goods, while demand increases as the pandemic abates and consumers’ pent-up savings and government controls.
For these reasons, Federal Reserve economists say inflation will be “transient” and will decline later this year as supply constraints ease. Let’s hope they are right. But the Fed may also underestimate the impact of its wide-open monetary policy, despite an economy that will grow once the pandemic blockages end and unemployment continues to decline at a rapid pace.
The yield on the 10-year Treasury bill fell to 1.66% on Friday, albeit below the peak of the day. Investors will want to keep an eye on Tuesday’s report on consumer prices for more inflation clues. The US has never before pursued government spending and monetary expansion of this magnitude with a hot economy, and the Fed says it will wait for sustainable inflation to materialize before changing. Good luck.