In January, Producer Prices in the United States steadily increased, providing further evidence of rising inflation and reinforcing the financial market’s belief that the Federal Reserve will not cut interest rates before the second half of the year.
Following the release of news that the Consumer Price Index (CPI) in January saw the largest increase in nearly a year and a half, the Labor Department reported on Thursday widespread price increases for producer prices. However, some details in the report indicated that the key indicators tracked by the Federal Reserve to achieve its 2% inflation target saw more moderate growth in January than expected after the strong CPI data.
Economists warned that with President Donald Trump pushing extensive import tariffs and large-scale deportations, the inflation trend may further rise. These measures could lead to labor shortages, higher wages, and increased prices for goods.
Kurt Rankin, senior economist at PNC Financial, said, “This report does delay expectations for rate cuts, and the rising costs for businesses may translate into consumer price pressures in the coming months; the Trump administration continues to threaten tariffs, which will overall raise business costs.”
The Bureau of Labor Statistics (BLS) reported that the Producer Price Index for final demand rose by 0.4% last month, with December’s data revised upward to a 0.5% increase. Economists interviewed by Reuters predicted that the Producer Price Index (PPI) would rise by 0.3%.
Over the twelve months ending in January, the PPI increased by 3.5%, mirroring the rise in December. The January PPI report from the BLS updated weights to reflect price changes in 2024 and seasonal adjustment factors used by the government to eliminate seasonal fluctuations in the data.
The increase in the PPI covered both goods and services. Wholesale prices for goods jumped by 0.6% in January following a 0.5% rise in December. More than half of the increase came from energy commodity prices soaring by 1.7%. Food prices rose by 1.1%, with egg prices surging by 44.0% due to an avian flu outbreak. Excluding food and energy, goods prices rose for the second consecutive month by 0.1%.
After climbing by 0.5% in December, service prices rose by 0.3% in January. Wholesale prices for hotel and motel rooms surged by 5.7%, accounting for more than a third of the increase in service prices.
Additionally, wholesale prices rose in sectors like automobile retail, land freight, food and beverage retail, clothing, jewelry, footwear and accessories retail, and bundled cable telecommunications.
However, the profit margin of fuel and lubricant retailers dropped by 9.8%. Portfolio management fees increased by 0.4%, while airline ticket prices decreased by 0.3%. Physician care prices decreased by 0.5%, and hospital inpatient care costs fell by 0.3%. Hospital outpatient prices fell by 0.4%.
Portfolio management fees, healthcare, hotel and motel accommodations, and airfares are components used to calculate the Personal Consumption Expenditures (PCE) price index (excluding food and energy), which is one of the indicators the Federal Reserve tracks for monetary policy.
Based on current CPI and PPI data, economists estimate that the core PCE price index in January increased by between 0.2% and 0.3%. This is lower than the 0.4% increase predicted by most after the CPI data release. The core inflation rate rose by 0.2% in December. It is expected that the core inflation rate in January will rise by 2.6% annually, slightly lower than the estimated 2.7% after the CPI report. The annual core inflation rate in December was 2.8%.
Samuel Tombs, chief US economist at Pantheon Macroeconomics, stated, “The Fed can still claim that progress towards the 2% inflation target is ongoing.”
With expectations for moderate core PCE inflation data in focus by investors, Wall Street stocks rose, the US dollar fell against a basket of currencies, and US Treasury yields declined.
The market’s expectation for rate cuts has been pushed from June to September, although some economists believe that the window for further easing has closed due to strong domestic demand and a stable labor market.
Federal Reserve Chairman Jerome Powell told lawmakers on Wednesday, “We are close on the inflation front, but we’re not there yet.” He added, “We currently aim to maintain restrictive policies.”
In January, the Fed kept the federal funds rate unchanged in the range of 4.25% to 4.50%, having cut rates by 100 basis points since the start of the accommodative policy cycle in September of last year. In 2022 and 2023, the Fed raised policy rates by 5.25 percentage points to curb inflation.
The fiscal, trade, and immigration policies of the Trump administration are believed to stimulate inflation. Tariffs of 25% on goods from Canada and Mexico have been postponed until March, but the additional 10% tariffs on Chinese goods took effect this month.
Another report from the Labor Department confirmed the stability of the labor market, showing that in the week ending February 8, initial claims for unemployment benefits dropped by 7,000 to a seasonally adjusted 213,000.
Economists had initially predicted a figure of 215,000 for the latest week.
So far this year, the number of people filing for unemployment benefits has continued to decline, aligning with historically low layoff numbers and supporting economic expansion. However, job opportunities for the unemployed are not as abundant as a year ago as companies take a cautious approach. Nonfarm payrolls increased by 143,000 in January, with an unemployment rate of 4.0%.
The report on unemployment benefit claims indicated that in the week ending February 1, the number of people continuing to receive benefits after the initial week (a true reflection of the labor market conditions) decreased by 36,000 to a seasonally adjusted 1.85 million.
Ben Ayers, senior economist at Nationwide, said, “Increased uncertainty in prices has made it difficult to expand operations, and the business sector remains cautious to observe potential disruptions in global supply chains.”
(This article references reporting from Reuters)