Inflation Is Back on Wall Street's Radar

The numbers surprise Wall Street as the Fed continues its dovish policy

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Panos Mourdoukoutas
Apr 09, 2021
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Inflation is back on Wall Street's radar today following the March Producer Price Index (PPI) release, which showed an increase of 1.0% over the previous month.

The PPI measures the average change over time in the selling prices received by domestic producers for their products. The prices included in the PPI are from the first commercial transaction for many products and some services.

March prices for final demand goods advanced 1.7%, with the index for final demand services moving up 0.7%. The final demand index increased 4.2% for the 12 months ended in March.

The March PPI gain follows a 2.8% increase in February and beats the market consensus estimate of 3.8%. It is the most significant advance in producer prices since September of 2011.

In other words, inflation is back and is nearly half a percentage point higher than already high expectations. This seems to be worrying Wall Street, as evidenced by the spike in Treasury yields.

But unchecked inflation doesn't seem to worry the Federal Reserve. In debating the global economy's state on Thursday, Federal Reserve Chairman Jerome Powell made the distinction between bottleneck inflation and persistent inflation. Bottleneck inflation is inflation due to a delayed response of the economy's supply-side to a rapid expansion of the demand side, which creates shortages, pushing prices higher.

Bottleneck inflation is usually temporary as price hikes will gradually temper off as supply catches up with demand. Persistent inflation, by contrast, is inflation due to the build-up on the expectations among market participants who expect the imbalance between the demand and the supply side of the market to continue for a long time.

What kind of inflation is the U.S. economy experiencing this time around? According to Chairman Powell, it's bottleneck inflation. Rising prices reflect delays in how the supply side of the economy is adjusting to the economic recovery from the Covid-19 pandemic. In this way, the Fed justifies its recent decision to keep its accommodative policy unchanged despite the strengthening economy.

While it's still unclear whether the Fed Chairman is right in his assessment of inflation, one thing is clear: Wall Street will be watching inflation statistics closely in the next few months.

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I’m a Professor of Economics at LIU Post in New York. I also teach at Columbia University. I’ve published several articles in professional journals and magazines, including Forbes, Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance.