Something funny happened on the way to the global reflation (telegraphed so loudly by the recent surge in 10Y yields to the highest level of 2015): PPI just crumbled by a sequential 0.4% in the month of April, despite expectations it would rise by 0.1% and continue the 0.2% monthly increase seen in March.   This was a -1.3% drop in PPI – the fastest fall in 5 years.

Worse, the annual decline in final demand goods was -5.2% Y/Y, the biggest drop in the revised series in record!

According to the BLS, more than 70% of the decrease in prices can be attributed to a 0.7-percent decline in the index for final demand goods, which in turn was driven by a -2.9% drop in Energy prices reversing two months of non-negative prints.

However, the overall weakness was far more pronounced and as the table below shows, March PPI declined in virtually every category. In fact, core PPI excluding food and energy also dropped by -0.2%, on expectations of a 0.1% increase, which was also a 0.8% decline froma year ago, moving ever further from the Fed’s 2.0% inflation bogey.

Follows the PPI slide breakdown by products and services:

Final demand goods: The index for final demand goods moved down 0.7 percent in April following a 0.3-percent rise in March. Leading the broad-based decline, prices for final demand energy fell 2.9 percent. The indexes for final demand foods and for final demand goods less foods and energy decreased 0.9 percent and 0.1 percent, respectively.

Product detail: Over 30 percent of the April decline in prices for final demand goods can be attributed to the index for gasoline, which decreased 4.7 percent. Prices for diesel fuel, jet fuel, utility natural gas, pork, and industrial chemicals also moved lower. In contrast, the index for pharmaceutical preparations advanced 0.5 percent. Prices for fresh and dry vegetables and for raw cotton also moved up.

Final demand services: The index for final demand services edged down 0.1 percent in April after inching up 0.1 percent in March. Leading the decrease, margins for final demand trade services fell 0.8 percent. (Trade indexes measure changes in margins received by wholesalers and retailers.) The index for final demand transportation and warehousing services declined 0.1 percent. Conversely, prices for final demand services less trade, transportation, and warehousing rose 0.2 percent.

Product detail: Over 40 percent of the April decrease in the index for final demand services can be traced to margins for machinery and equipment wholesaling, which declined 1.0 percent. The indexes for automotive fuels and lubricants retailing; health, beauty, and optical goods retailing; portfolio management; and food and alcohol retailing also moved lower. In contrast, prices for securities brokerage, dealing, investment advice, and related services climbed 4.0 percent. The indexes for food wholesaling, inpatient care, and passenger car rental also advanced.

And so as wholesale deflation rages, and countless other charts are screaming recession, we can’t wait for the Fed to hike rates just so it can push the US back into recession and have the alibi to unleash QE4.


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