US producer prices post surprise drop in March, bolstering case for Fed patience

US producer prices unexpectedly declined in March, suggesting some cooling in pipeline inflation pressures and supporting the Federal Reserve’s cautious approach to interest rate policy.The Producer Price Index (PPI) for final demand fell 0.4% on the month, the largest drop since October and well below economists’ expectations for a 0.1% increase. On a year-on-year basis, PPI rose 2.7%, slowing from a 1.6% gain in February and missing forecasts for a 3.3% increase.

Core PPI, which excludes the volatile food and energy components, declined 0.1% on the month versus estimates for a 0.2% rise. The annual rate stood at 3.3%, also softer than the anticipated 3.5%.
The data, released by the Labor Department on Thursday, comes a day after a hotter-than-expected consumer inflation report and may help temper market fears that the Fed will delay cutting rates. Investors trimmed bets on a June rate cut following Wednesday’s CPI release, but the weaker PPI reading could renew confidence that inflation is gradually easing.

Markets now turn to retail sales and labor market data for additional direction on monetary policy.

Adding to the cautionary tone, consumer confidence data also showed signs of strain. “Consumer sentiment plunged 11% this month to a preliminary reading of 50.8,” the University of Michigan said Friday, calling it “the second-lowest reading on records going back to 1952.” The report noted April’s sentiment was worse than levels seen during the Great Recession.