US PPI undershoots, strong dollar appears to have played only a minor role

The 0.4% m/m decline in final demand producer prices in April, which pushed the annual PPI inflation rate down to -1.3%, from -0.8%, does not mean that the risk of a deflationary spiral is rising. The weakness was due to lower gasoline prices and the way that margins are calculated in this new broader PPI measure. The stronger dollar appears to have played only a minor role.

The fall last month was principally due to a 4.7% m/m decline in gasoline prices. This is mainly due to the PPI quirk that prices are measured in one specific week in each month. The CPI, which measures prices throughout the month, should show a much smaller 1.0% m/m decline in retail gasoline prices in April. Furthermore, with crude oil prices now rebounding, gasoline prices will follow suit soon.

Other big factors behind April's PPI decline were the 0.8% fall in trade services and the 1.0% fall in machinery & equipment wholesaling. In both cases, those declines were due to shrinking margins. The decline in trade services margins looks particularly suspicious, since falling gasoline prices, which are the biggest input const into trade services, should be driving those margins higher not lower.