U.S. March PPI Preview: Inflation Accelerates Again Under Oil Price Shock

TradingKey - Following last week's release of March CPI figures which rebounded to 3.3% year-on-year, the market has shifted its focus to the March Producer Price Index (PPI) due on Tuesday ET. This provides a key window for the Federal Reserve to gauge when inflationary pressures pass through to end-consumers and serves as a measure of the depth of the Middle East conflict's impact on the real economy.

According to market forecasts, both the annual PPI and core PPI for March are expected to break above 4%. The annual PPI rate may reach 4.6%, marking its highest level in over three years, while the annual core PPI is set to surpass 4.1%.

Surging energy prices serve as the primary driver of PPI.

The market widely expects the March PPI to exhibit an "across-the-board" rise, with surging energy prices serving as the primary driver of this upward trend. In March, Brent crude futures surpassed $100 on March 8—the first time since mid-2022—as shipping in the Strait of Hormuz reached a near-standstill due to the U.S.-Iran conflict.

Approximately 20% to 30% of global crude oil is transported through the Strait of Hormuz, and this supply disruption has directly pushed up upstream costs for enterprises. Gasoline prices surged 21.2% in a single month, while the energy component soared 12.5% year-on-year. The U.S. services price index has jumped to 70.7%, its highest level since October 2022, as businesses clearly identify rising oil and fuel costs as the main reason for price increases.

Upstream inflation transmission to the midstream has begun.

The manufacturing price index surged to 78.3% in March, the highest level since June 2022. Rising commodity prices for materials such as steel and aluminum, coupled with tariff factors, have subjected businesses to immense input cost pressures.

Automobile manufacturing is heavily dependent on steel, aluminum, and plastics; higher new car prices have indirectly bolstered the used car market, where prices have hit a nearly three-year high. Furthermore, rising fertilizer costs have left food prices vulnerable, leading to a broad-based increase in the cost of living for the American public.

PPI data may further push back rate cut expectations.

The February PPI rose 3.4% year-over-year, exceeding expectations and prompting the interest rate futures market to essentially rule out a rate cut in the first half of the year, with the probability of a cut within the year falling to around 60% at one point.

If the March PPI exceeds 4% as expected, the market's assessment that the Federal Reserve will forgo rate cuts this year will be further reinforced. Fed Chair Jerome Powell previously stated that no rate cuts will occur without progress on inflation, and currently, sustained high oil prices have led some officials to begin discussing the possibility of a rate hike.

Chicago Fed President Austan Goolsbee warned that high oil prices triggered by the U.S.-Iran conflict could catalyze a 'stagflationary recession,' where consumption contraction and rising inflation occur simultaneously.

Based on the latest PMI data, the services employment index for March plummeted to 45.2%, its lowest level since late 2023, while the new orders index climbed to a two-year high of 60.6%, presenting a classic contradictory combination of 'cooling employment but resilient demand.'

This structure makes the Federal Reserve's decision-making path more difficult: weak services employment suggests room for rate cuts, but the stubbornly high prices paid index makes policy easing nearly impossible. How the Fed manages the dual pressures of inflation and employment may become clearer through future data and the tone set at upcoming Fed meetings.