Producer prices came in far hotter than expected in April, with the headline Producer Price Index rising 1.4 percent for the month—nearly triple Wall Street’s forecast—and six percent from a year earlier. Services prices rose 1.2 percent, and goods prices climbed two percent.
Energy prices have understandably captured most of the attention. Final demand energy prices jumped 7.8 percent in April. Gasoline alone surged 15.6 percent. Diesel fuel, jet fuel, and residual fuels also rose. Not surprisingly, energy-adjacent services—especially trucking services—also rose sharply. This was, first and foremost, an energy-driven supply shock.
But that is not the whole story. Hidden beneath the soaring energy prices, the April PPI revealed that we’re seeing a totally different kind of inflation in another part of the economy. It is demand-driven rather than a supply shock. And it is hitting businesses rather than consumers. We’re talking, of course, about the artificial intelligence investment boom.
To get the obvious concern out of the way, this isn’t something that’s going to drag down consumer sentiment. It won’t get much attention from the Fed because our monetary policymakers define price stability in terms of consumer spending. And prices for data processing and internet services actually fell 0.4 percent in April and were down 0.4 percent from a year earlier. Wireless telephone prices are down almost 3.7 percent for the year and were flat in April. In other words, the PPI is not saying that “the cloud” is getting more expensive as a service.
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