Inflation Outlook Remains Cloudy: Fresh Numbers, Old Questions

by: James Picerno

Like so many economic reports these days, Friday's update on producer prices for March is open to interpretation.

Depending on one's capacity for optimism, or the lack thereof, the latest gauge of inflation represents either a reprieve from anxiety, or another reason to worry.

The good news is that wholesale prices rose 1% last month. Although that's uncomfortably high, it's down a bit from February's 1.3% pace. Meanwhile, core PPI (excluding energy and food) was unchanged in March and below the 0.2% rise that the consensus outlook was projecting.

The bad news is that the PPI has climbed by 3.1% for the year through March. That's far below the 12-month rolling peak in recent years, but it's still too high to allow the Federal Reserve to focus exclusively on promoting economic growth in its monetary policy. "This certainly doesn't let the Fed off the hook by any means,'' Gina Martin, an economist at Wachovia Corp., told Bloomberg News. Inflation doesn't seem to be rising, but neither is it falling, she explained. That's a concern because inflation is "stubbornly staying high."

Energy prices led the way for upward prices momentum in the PPI last month. The 3.6% climb in energy costs at the wholesale level was the highest since last November. If energy prices fall in coming months, PPI may reap the benefits, which will be all the sweeter considering the core PPI appears contained for the moment.

Corroboration or repudiation for such thinking will come on Tuesday, when consumer prices for March are released. For what it's worth, the consensus estimate calls for a slight increase in top-line CPI to 0.7% from 0.6% previously with core CPI coming in at 0.2% for the second month running, according to Briefing.com.

Clarity on inflation is coming, but it's not here yet. Indeed, the bond market at mid-morning Friday appeared to be taking a wait-and-see attitude. The 10-year Treasury yield was virtually unchanged from Thursday's close. Over in Fed funds futures trading, there's not much conviction for change in the near future other than for the status quo of 5.25%.

Investing in the 21st century enjoys a reputation for rapid trading, second-by-second analysis and the ability to move billions of dollars at the push of a button. But economic numbers, and the associated trends, can still dribble out at a snail's pace. As a result, the inflation outlook remains clouded and so there's still a strong incentive for cautious types to sit on overweight cash positions and wait for yet another round of data releases.