Wholesale prices rise less than expected, showing slight impact from war

Dive Brief:

The producer price index, a gauge of prices charged by wholesalers, rose a less-than-expected 0.5% in March, showing that a war-triggered surge in energy prices last month did not jar the broader economy.
The increase in March matched the 0.5% gain in February, before U.S.-Israeli attacks on Iran began on Feb. 28. The PPI index excluding food and energy prices rose in March by just 0.1%, the Bureau of Labor Statistics said Tuesday, noting that a 15.7% jump in gas prices fueled nearly half of the gain in goods prices.
“Producer inflation was relatively welcome news,” Scott Helfstein, head of investment strategy at Global X ETFs, said in a note. “The impact of energy prices did not really trigger a serious shift in costs,” he said, noting “companies continue to show remarkable resilience in the face of supply chain, tariff and now energy challenges.”

Dive Insight:

Although estimates on the war’s impact on inflation and gross domestic product vary, economists agree that harm to the economy will mount over time.

The U.S. economy will likely grow 2.3% this year, the International Monetary Fund forecast Tuesday, marking down its forecast in January by 0.1 percentage point because of the war.

Each passing week, however, increases the probability of a worst case scenario, in which oil prices persist at $110 per barrel on average and global growth slumps below 2%, IMF Chief Economist Pierre-Olivier Gourinchas said during a press briefing on Tuesday.

“Every day that passes and every day that we have more disruption in energy, we are drifting closer towards the adverse scenario,” he said during a news conference.

Most corporate economists (59%) believe that higher inflation from the Iran war will prove temporary and that the U.S. economy will suffer just a slight setback from the conflict and expand 2.2% this year, Wolters Kluwer found in a monthly survey.

Still, tension in the Persian Gulf prompted the economists to raise the odds of a U.S. recession during the next 12 months to 35%, Wolters Kluwer said.

Soaring headline inflation — and the possibility that the Federal Reserve further postpones a reduction in borrowing costs — has prompted caution among economic forecasters.

The Consumer Price Index including all categories of prices rose 0.9% last month, or 3.3% on an annual basis, with a 21.2% leap in an index for gasoline fueling nearly 75% of the increase, the Bureau of Labor Statistics said Friday.

At the same time, the CPI excluding volatile food and energy prices increased just 0.2% in March, or 2.6% over 12 months after a 2.5% annual gain in February, the BLS said. The Fed seeks to hold inflation at no more than 2%.

The ability of the U.S. to meet most of its energy needs buffers it against the worst of the current oil shock.

“The U.S. economy remains resilient,” Ed Yardeni, president of Yardeni Research, said in a note.

The “economy has passed several stress tests in recent years,” he said. “The war in the Middle East is proving to be the latest stress test for the U.S. economy, which seems to be passing it, so far.”