Economic Update 4-16

Top 5 Takeaways This Week:

• Producer prices came in below expectations, with PPI rising 0.5% in March versus a 1.1% forecast.

• Energy costs remain elevated, increasing 8.5% and continuing to drive inflation pressures.

• Core inflation showed moderation, rising only 0.1% for the month.

• Inflation is likely to remain elevated in the near term, largely tied to energy market disruptions.

• The Fed is expected to remain patient, with potential rate cuts later in the year.

This morning, we had the release of the Producer Price Index (PPI) for March. While the results were generally below forecasted levels, we continue to see higher oil prices putting pressure on most inflation measurements. The continuing conflict with Iran, resulting in disruptions within the oil market, has been a primary factor in increasing the costs of energy in both transportation and production cycles.

The headline PPI number for March was an increase of 0.5% on a month-over-month basis. This matched the increase for February but was well below the forecasted level of 1.1%. Overall, energy costs were up by 8.5%, and transportation costs increased by 1.3%. On a year-over-year basis, the PPI was up 4.0% for March. While this was well above the February level of 3.4%, it was below the forecast of 4.6%. However, this represented the highest inflation reading since February of 2023.

The Core PPI (less food and energy) rose by only 0.1% during March. This was actually below the February reading of 0.3% and, again, well below the forecast of 0.5%. On a year-over-year basis, both March and the previous month were up 3.8%, again below the forecasted level of 4.1%.

The above is very similar to the CPI readings we saw last week. Generally, the Consumer Price Index releases showed March levels above February but below consensus expectations. Considering PPI readings are somewhat of a forward-looking indicator of upcoming consumer pricing, I think we should expect inflation levels to remain somewhat elevated until we see a resolution to the Iran conflict in some form.

Once oil disruptions are resolved and deliveries are normalized, I think oil prices will revert back to levels seen a few months ago. Although it will take a while to work through the system, lower energy costs will be the catalyst to bring down overall costs and allow inflation to again fall closer to the 2% level the Fed has been targeting. Given the current realities, I am not expecting the Fed to cut rates before mid-year. However, I still think two interest rate cuts could occur before year-end.

On the investment side, we have largely maintained our equity positions, and this has generally been beneficial. Although volatile, our equity holdings have provided a positive return this year. We have also put funds to work in the fixed-income market as opportunities have been presented. We feel locking in today’s interest rate levels will be attractive over the next twelve to eighteen months.

Enjoy your week, especially as the weather feels more like spring. Also, hope you finished your taxes. Remember to thank those who worked hard to finish-up your taxes on the 15th.