March producer prices rose by 0.5%, driven largely by energy costs. Oil prices have eased since, but supply disruptions are unlikely to fade anytime soon.
The downside surprise came from softer-than-expected core inflation of 0.1%. Upstream price pressures will take time to feed through to core measures, which carry greater weight for policymakers.
Categories that feed into the Federal Reserve’s preferred PCE inflation gauge showed firmer March increases, led by a 4.1% rise in airfares—suggesting core PCE could accelerate more than the PPI data alone implies.
The Strait of Hormuz disruption now clearly extends beyond energy. Fertilizers and key industrial chemicals, essential to food production and other sectors, are also affected.
Core inflation has already been trending higher since mid-2024, partly because of tariffs, and would not take much additional pressure to firm further.
In the near term, the disruption is likely to weigh on growth while lifting inflation for at least three months, pointing to a weaker second quarter than previously anticipated. The situation remains fluid, but the outlook does not suggest an economy nearing crisis, at least in the U.S.
Read more economic analysis from RSM’s global team of economists.
One mitigating factor is demand destruction in non-energy categories. Lower-income households are likely to pull back on discretionary spending, which could help contain broader price pressures.
That dynamic should give the Fed room to remain patient—a prudent stance given elevated uncertainty.
