Hit a new high in 2022! US April PPI inflation unexpectedly "blows up", raising interest rate expectations

Data released by the US Bureau of Labor Statistics on May 13 showed that the Producer Price Index (PPI) soared by 1.4% in April, the largest monthly increase since March 2022, far exceeding market expectations of 0.5%. Previous data for March was also revised up to 0.7%. On a year-on-year basis, the PPI surged to 6.0%, the highest level since December 2022, significantly exceeding market expectations of 4.8%. Excluding food and energy, the core PPI rose by 5.2% year-on-year and 1.0% month-on-month, roughly 1.2 times and 3.3 times the expectations, respectively. This data comes just after the release of the April Consumer Price Index (CPI) on Tuesday, which reached 3.8% year-on-year, the highest in nearly three years. Both major inflation indicators have exceeded expectations, causing significant impacts on the global asset pricing system. The structure breakdown of the PPI: full transmission of energy shocks The significant increase in the April PPI was mainly driven by the double rise in energy and service prices. Energy costs rose by 7.8% year-on-year in that month. Overall commodity prices saw the highest increase since 2022, with about three-quarters coming from the surge in final energy prices. Gasoline prices led the way with a staggering increase of 15.6%, contributing over 40% to the overall increase in commodity prices. Prices of aviation fuel, diesel, industrial chemicals, etc., also rose simultaneously. Service prices rose by 1.2%, the largest increase in four years. Transportation and warehousing services prices jumped by 5%, mainly driven by the increase in road freight prices and the expansion of profit margins for fuel retailers. Trucking costs rose by 8.1% in a single month, the largest increase since records began in 2009. Analysts had previously identified this category as one of the most sensitive areas to the rise in energy prices driven by the Middle East conflict. It is worth noting that the cost of intermediate demand processed goods rose by 5.6% in the past two months, the largest increase in five years, indicating that inflation pressure in the early stages of production is still accumulating. Even excluding food and energy, processed product prices in April showed an accelerating upward trend. With the fragile ceasefire and no resolution in the Middle East conflict, the rise in energy and transportation costs is gradually spreading to a wider range of goods and services, leading to a continuous build-up of cost pressures for businesses. Some subcomponents of the PPI that are directly linked to the Federal Reserve's key indicator - the Personal Consumption Expenditures Price Index (PCE) - showed relatively moderate performances, providing some cushion for the market. Investment management fees decreased by 2.4% month-on-month, while the increases in various healthcare subcategories did not exceed 0.3% month-on-month. Although airfare prices rose by 3% compared to the previous month, the overall impact was limited. Economists estimate that the core PCE year-on-year increase for April may rise to 3.4%, significantly lower than the "staggering" reading of the PPI, but still 1.7 times the Federal Reserve's 2% target. Hawkish expectations intensify, US bond yields rise The PPI data further strengthened the sharp reversal of Federal Reserve policy expectations following the release of the CPI report on Tuesday. According to the pricing of the CME FedWatch tool, the market has largely ruled out the possibility of any rate cuts between now and the end of 2027. Instead, the market now expects the probability of a 25 basis point rate hike by the end of this year to be around 50% (compared to 37% on Tuesday), and market pricing shows that the Fed is expected to raise rates by approximately 24 basis points cumulatively before the June 2027 policy meeting. After the PPI data was released, the US Treasury market, which serves as a global asset pricing benchmark, immediately reacted. The yield on the 10-year US Treasury bond rose by about 1.5 basis points to 4.487% after the release of the PPI data, reaching the highest level since July 2025; the yield on the 2-year US Treasury bond rose back above 4.00%, hitting a new high since March. Overall, US bond yields across all maturities are experiencing a systemic rise, with the driving factors becoming increasingly clear: following the release of the CPI data on Tuesday, the yield on the 10-year US Treasury bond rose by 4.95 basis points to 4.469%; the 30-year yield rose by 3.76 basis points to 5.0242%; the 5-year yield rose by 5.30 basis points to 4.1259%. In less than three months since the outbreak of the US-Iran conflict in late February, US bond yields have risen significantly across the board. The rise in long-term yields has outpaced that of short-term yields - the 30-year yield has surpassed the 5% psychological threshold, maintaining a spread of about 90 basis points between the 30-year and 5-year yields, forming a typical "steep bearish" pattern in the yield curve. Technical signals in the bond market are also cause for concern. The bid yield for the 10-year Treasury auctioned at $42 billion was 4.468%, higher than the pre-issuance trading levels, and the allotment to primary dealers increased to 12%, indicating that primary dealers were forced to take on more supply when regular investor demand was insufficient. At the same time, short positions in 10-year Treasury futures have accumulated to the highest level in over a month, indicating a systemic buildup of selling pressure. The "steep bearish" pattern in the yield curve structure indicates that the market is pricing in two aspects at the same time: the short end reflects the revaluation of rate hike expectations on policy rates, while the long end reflects the continued high inflation, expanding debt supply, and the return of sovereign credit risk premiums. This double pricing logic bears a high degree of structural similarity to the interest rate trends during the inflation crisis of 2022. Mark Zandi, Chief Economist at Moody's Analytics, commented on this, saying: "For the Federal Reserve, the decisive factor will be inflation expectations - if inflation expectations do continue to rise, then I think the Fed may shift its focus to inflation and start hiking rates instead of cutting them." This hawkish expectation poses a particular challenge for Kevin Warsh, the incoming Federal Reserve Chairman. Warsh has publicly supported rate cuts, but Zandi bluntly stated, "In the current environment, I don't see how he could get any support for cutting rates. If inflation expectations continue to rise, not only will rate cuts be out of the question, but maintaining rates at current levels will also be quite difficult."