Producer Price Index fell by 0.5 percent in April, price increases and lower demand likely cause: CEI analysis

The Producer Price Index for April shows the seasonally adjusted final demand fell by 0.5 percent. CEI senior economist Ryan Young says the imbalance of prices being pushed up from tariffs and overall slower demand are likely the cause.

“There are two competing forces in the Producer Price Index right now. Tariffs are pushing prices up, and slow demand is pushing prices down. Right now, that downward pressure from slower demand is stronger than expected, at least compared to the upward pressure from tariffs.

“Companies are trying to absorb some of the tariff increases, which is showing up in lower margins. Ultimately, they will still have to pass on most of the cost. For example, the grocery industry averages a 2 percent margin. That is not nearly enough to absorb a 10 percent tariff, let alone a 145 percent tariff. On net, tariffs put upward pressure on prices.

“Downward pressure on prices is coming from slower demand. There was a demand spike before the tariffs hit as companies stockpiled as much as they could. The flipside is slower demand after those tariffs come into effect. That is starting to happen now.

“It is uncertain what the near future holds. The UK and China agreements might spell out roughly what most tariff rates will look like once they stabilize, and more deals get done. But with this administration, nothing is ever that stable.

“Some producers might wait things out if lower tariff rates seem likely. This would put downward pressure on producer prices. Other businesses in less politically sensitive industries might go back to roughly business as usual, though at permanently higher prices and the resulting lower demand. In short, anything could happen.”