A worker on the trim assembly line at the General Motors assembly plant in Fort Wayne, Indiana, on April 9, 2024. Photographer: Emily Elconin/Bloomberg.
Prices paid to U.S. producers unexpectedly declined in April by the most in five years, largely reflecting a slump in margins, which suggests companies are absorbing some of the hit from higher tariffs.
The 0.5 percent decrease in the producer price index (PPI) followed no change in March, according to Bureau of Labor Statistics (BLS) data released today. The median forecast in a Bloomberg survey of economists called for a 0.2 percent gain. Excluding food and energy, the PPI declined 0.4 percent—the most since 2015. Stripping out food, energy, and trade—a less-volatile measure favored by many economists—prices fell 0.1 percent, the first decline in five years. Compared with a year ago, the gauge rose 2.9 percent.
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These figures suggest that American manufacturers and service providers are, so far, refraining from passing along higher U.S. tariffs on imports. The impact on consumers has also been modest, even as producers are feeling the pinch from aggressive levies on imported materials and other inputs. “For now, distributors are not passing on all these extra costs to consumers,” Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, wrote in a note. He added that it took three months after tariffs were imposed on washing machines in 2018 before consumers began seeing higher prices. “It will take more time to assess whether a sustained squeeze on margins is occurring.”
Business leaders are wrestling with how best to mitigate the impact of higher tariffs in a frequently changing policy environment. In the latest Federal Reserve Bank of Atlanta business inflation expectations survey, fewer than one in five firms said they would be able to fully pass on a 10 percent increase in costs.
Some businesses have been absorbing some of the extra costs in an effort to avoid a pullback in demand at a time when consumers are already feeling jittery about the economy. Consumer sentiment has slumped, and a separate report out today showed retail sales barely rose.
After a slew of economic reports, Treasuries extended the rally as traders boosted their expectations of Fed rate cuts. The dollar remained lower, while the S&P futures pared some earlier losses.
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Automaker Stellantis NV is offering discounts on its vehicles, while Hyundai Motor Co. is holding prices steady until June. The pricing actions show how some of the largest carmakers are trying to calm worries that tariffs on imported cars will drive up prices by thousands of dollars.
At the same time, other retailers anticipate that shoppers will experience higher prices. Walmart Inc., after delivering another quarter of solid sales and earnings growth, cautioned that because of tariffs and increasing economic turbulence the retailer expects to begin raising some prices this month.
Companies that are hiking prices risk losing sales. However, not increasing prices poses a risk to profit margins. Many businesses are also seeking other ways to cut costs or striving to boost productivity. The PPI report showed goods prices excluding food and energy increased 0.4 percent in April. The cost of business equipment, including computers and industrial material–handling machinery, accelerated.
Food prices dropped for a second month as the cost of eggs retreated more than 39 percent. Energy costs decreased for a third month. Final-demand services prices decreased 0.7 percent, the most in data going back to 2009. More than 40 percent of this decrease was attributed to declines in margins for machinery and vehicle wholesaling.
One reason analysts pay close attention to the PPI is that some of its components are used to calculate the Fed’s preferred measure of inflation. Those categories were largely weaker in April, due to a slump in portfolio management and airfares, although healthcare categories moved higher. The personal consumption expenditures (PCE) report for April will be published later this month.
While increased tariffs risk driving costs higher, subdued prices of many commodities may help temper the degree of pass-through to consumers and customers of the nation’s producers.
The costs of processed goods for intermediate demand, which reflect prices earlier in the production pipeline, edged higher in April after falling in March. Unprocessed goods prices fell sharply on cheaper food and energy.
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