PPI +0.5%: Tariff Inflation Was a Mirage

Headline PPI at +0.5% month-over-month doesn't just miss the 1.1% consensus — it demolishes the trajectory. February's PPI index stood at 269.296; March printed 274.102. The acceleration everyone feared from tariff escalation never materialized in the headline number.

Core PPI excluding food, energy, and transport rose to 3.6% year-over-year, and bears will cite this as evidence of sticky underlying pressures. They're half right. Core is elevated — but it decelerated on a month-over-month basis, and the year-over-year figure is distorted by base effects from last spring's tariff surge. Strip out the base effect, and the run-rate is consistent with the Fed's 2% target within two quarters.

Food prices did spike 2.4%, with fresh vegetables up 50%. That's a supply shock from weather disruption, not a tariff story. It'll wash out in 60 days.

WTI crude at $92.18 is down 19% from the April 6 peak of $114.01. Brent has followed. The Iran war premium that drove oil above $100 is unwinding as diplomatic channels reopen.

Energy is the single largest input cost in the PPI basket. When oil was at $114, the argument for persistent producer inflation was straightforward — energy costs flow through every supply chain node within 60-90 days. At $92, that transmission mechanism weakens dramatically. Gasoline futures have already repriced lower.

The 10-year Treasury yield at 4.31% reflects this shift. If markets truly expected a second inflation wave, the 10Y would be above 4.50%. Instead, yields have drifted lower from the March 27 high of 4.44%, consistent with declining inflation expectations. The 2-year at 3.81% is pricing in at least one rate cut by year-end.

The February PPI print of 0.7% locked the Fed into a hold at 3.50-3.75%. March's 0.5% doesn't guarantee a cut, but it removes the single strongest argument against one.

Fed funds futures had priced zero cuts through September before this print. That's already shifting. If April CPI confirms the disinflation trend — and falling oil prices make that likely — a June or July cut becomes the base case. The yield curve is already responding: the 2s-10s spread widened to +50 basis points, the steepest since the hiking cycle ended.

The Fed's problem was always sequencing. They couldn't cut into accelerating PPI without destroying credibility. March PPI gives them cover. Powell's April 29 press conference will be the tell — watch for language shifting from "data dependent" to "gaining confidence."

Rate-sensitive assets are the obvious beneficiaries. Treasury bonds with 5-10 year duration gain the most from falling rate expectations. REITs and utilities — the sectors most punished by the "higher for longer" trade — have the widest gap between current pricing and fair value if a cut materializes.

Avoid the temptation to rotate into growth at current multiples. The S&P at 6,955 already reflects some rate cut optimism. The better trade is duration: lock in the 10-year at 4.31% before the market fully reprices the disinflation trend.

Gold at $4,831 is a trickier call. The metal rallied on both the inflation scare and the rate cut hope — it can't benefit from both narratives simultaneously. If disinflation wins, gold's ceiling falls. Real yields rising while nominal yields hold means gold loses its relative attractiveness.