The U.S. Economy Is Cooling

Applications for unemployment benefits climbed to a more than one-year high and wholesale inflation continued to moderate, adding to signs of softening in the economy.

The producer price index (PPI) for final demand increased 2.3 percent in April from a year ago, the slowest pace since early 2021, extending a year-long easing tied to falling commodities costs and improved supply chains. Government data released on Thursday also showed initial jobless claims last week rose to the highest since October 2021.

At a high level, the reports may bolster chances that the Federal Reserve will pause its run of interest-rate hikes at next month’s meeting. However, details beneath the surface show persistent inflationary pressures that officials are struggling to tame.

The PPI data come a day after the consumer price index (CPI) indicated inflation—though still high—is beginning to show promising signs of moderation. While shipping delays, shortages, and other logistics headaches sharply drove up prices for a variety of goods in 2021 and the first half of 2022, the gradual amelioration of these challenges has been a key disinflationary force.

“If you take the totality of the data this morning and CPI yesterday as well, these numbers certainly argue that the Fed should take a breather and watch the landscape over the next few months,” said Omair Sharif, president of Inflation Insights LLC.

“The bottom line is that there’s uncertainty right now in general and if that uncertainty is feeding into the labor market, that’s an even bigger reason for the Fed to pause right now and just get a sense of where things are headed.”

At the same time, the tightness of the labor market has driven up wages and kept upward pressure on prices. While unemployment remains low, the latest jobless claims figure suggests some softening.

Under the headline figure, 80 percent of the monthly rise in the PPI was due to services. That included increases for portfolio management, food wholesaling, and a handful of healthcare-related costs.

And within the claims report, about half of the unadjusted rise in applications was due to one state—Massachusetts.

What Bloomberg Economists Say…

“The recent surge in jobless claims is consistent with our analysis of WARN notices, which since early this year have suggested imminent softening in the labor market. This will be reflected in coming weeks, when we see clearer signs of labor-market easing in the monthly jobs report.”

— Eliza Winger, economist

The Fed, which raised interest rates above 5 percent for the first time since 2007 last week, is now closely monitoring service prices for signs that inflationary pressures are meaningfully abating. Excluding the volatile food and energy components, the so-called core PPI increased 0.2 percent last month and was up 3.2 percent from April 2022. Also stripping out trade services, the PPI rose 0.2 percent from a month earlier and 3.4 percent from a year ago.

Several categories from the PPI report, notably in healthcare, are used to calculate the personal consumption expenditures price gauge—the Fed’s preferred inflation measure—which will be released later this month.

Prices of hospital outpatient care rose at a faster pace in April than a month earlier, as did home health and hospice care. Meanwhile, hospital inpatient care and nursing home care costs moderated.

Costs of processed goods for intermediate demand, which reflect prices earlier in the production pipeline, dropped 0.4 percent due to a decline in energy and food costs. Excluding these costs, the category rose by the most in nearly a year.

—With assistance from Chris Middleton.

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