The US March PPI is below expectations overall! Energy shock transmission has not yet gotten out of control, and the inflation warning may be temporarily dismissed.

Despite the Middle East war pushing up energy prices and reigniting concerns in the market about a resurgence in inflation, the US March PPI - an indicator measuring upstream costs of goods and services for final demand - showed a much lower increase than expected. Data released by the US Bureau of Labor Statistics on Tuesday showed that the March PPI rose by 4% year-on-year, the largest increase since February 2023, although higher than the previous value of 3.4%, but lower than the market expectation of 4.6%; the month-on-month increase was 0.5%, lower than the market expectation of 1.1%, and the same as the revised previous value of 0.5%. The core PPI, which excludes volatile items such as food and energy, showed a year-on-year increase of 3.8%, lower than the market expectation of 4.1%, and the same as the revised previous value of 3.8%; the month-on-month increase was 0.1%, much lower than the market expectation of 0.5%, and also lower than the revised previous value of 0.3%. As expected, energy was the main factor driving the increase in the March PPI index. According to data from the Bureau of Labor Statistics, the gasoline index soared by 15.7%, contributing about half of the PPI increase. Diesel prices alone surged by 42%, while aviation fuel prices increased by 30.7%. As a result, commodity prices rose by 1.6%, but this was offset by stable service costs. Investment management costs, which had previously pushed up the PPI index, increased by 1% month-on-month and 10.8% year-on-year in March. Furthermore, the producer-side price increase was lower than the 0.9% increase in consumer actual payment prices in March; core consumer prices also showed modest growth, rising by only 0.2%. The market had a subdued reaction to the report. The three major US stock indices edged up slightly on Tuesday morning, while US Treasury yields remained basically steady. In contrast, the US March CPI data released last week showed a different picture from the latest PPI data. Due to the impact of the Middle East conflict on soaring gasoline prices and the continued transmission effects of tariffs, the US March CPI rose by 3.3% year-on-year, the fastest pace since 2024, also the first time since the summer of 2024 that the year-on-year increase exceeded 3%, higher than the previous value of 2.4%, and in line with market expectations; the month-on-month increase was 0.9%, the largest since June 2022, in line with market expectations but much higher than the previous value of 0.3%. This CPI data highlights the rapid spread of the Middle East conflict to the US economy, exacerbating the price pressures that many American households have faced in recent years. Although some inflation indicators for March show a resurgence in price pressures, if underlying inflation remains moderate and, equally important, if the ceasefire agreement between the US and Iran holds, Federal Reserve policymakers may choose to "look the other way" at these inflation data. Since the US and Iran announced a two-week ceasefire agreement, energy prices have fallen. The price of US light sweet crude oil has fallen by nearly 15% in the past week, despite rising by almost 70% so far this year. Federal Reserve officials have expressed a certain degree of caution about the impact of the Middle East conflict, but they generally believe that inflation will continue to ease this year and move back towards the central bank's 2% target. However, the market expects the Federal Reserve to keep interest rates unchanged throughout the year. The CME Group's "FedWatch" tool shows a low probability of a rate cut by the Federal Reserve this year, although many Wall Street institutions still predict one or even multiple rate cuts. Before the release of the March PPI data, there was a prevailing narrative in the market of "Middle East tensions impacting energy prices and consequently raising inflation," creating a higher risk premium in expectations. However, the latest data shows that while energy subcomponents were still the main contributors to the March PPI increase, the actual performance of the energy PPI index was significantly weaker compared to the trend in oil prices during the same period, indicating that price transmission effects on the energy side were somewhat restrained. The data shows that while the contribution of energy costs to overall inflation figures is prominent, it did not spiral "out of control" as previously expected. This corroborates a similar pattern seen in the earlier US CPI data for March - the actual transmission magnitude of energy shocks was once again lower than the market's pessimistic expectations. For investors, concerns about energy inflation in the short term may diminish. It is worth noting that although overall inflation data for March was relatively moderate, upstream price indicators measuring "pipeline pressures" are accelerating, indicating that potential risks of price pressures cascading downstream are still present and showing signs of strengthening. This implies that the lower-than-expected March PPI data reflects more on the short-term failure to fully realize energy shocks, rather than a substantial decline in inflation pressures. If upstream price pressures continue to accumulate and transmit to the consumer end, there is still a possibility of a resurgence in inflation data in the coming months. For investors who use the PPI as a leading indicator of inflation, the continuous increase in pipeline pressure indicators is a risk signal that cannot be ignored in the current data.