US Producer Inflation Rises, But Core Inflation May Be Cooling

U.S. producer prices saw a solid increase in January, signaling a potential resurgence of inflation and potentially extending the pause on interest rate cuts, Reuters reports. This follows Wednesday's news that consumer prices saw their largest increase in nearly 18 months. However, some details of the PPI report suggest a more moderate increase in key inflation measures tracked by the Federal Reserve than initially anticipated.

Economists warn that inflation could trend even higher as President Trump's policies, including tariffs and mass deportations, potentially fueling labor shortages and pushing up wages and goods prices.

"The report does give pause to rate cut expectations, however, as higher business costs are likely to translate into upward pressure on consumer prices in the months to come," said Kurt Rankin, a senior economist at PNC Financial, to Reuters. "Tariffs continue to be threatened by the Trump administration, which would raise costs for businesses across the board."

The producer price index (PPI) for final demand rose 0.4% last month, according to the Bureau of Labor Statistics (BLS). Economists polled by Reuters had predicted a 0.3% increase. Over the past 12 months, the PPI advanced 3.5%, matching December's increase. The BLS updated weights to reflect price movements in 2024 and adjusted for seasonal fluctuations in the January PPI report.

The PPI increase was broad-based, affecting both goods and services. Wholesale goods prices jumped 0.6%, driven in part by a 1.7% increase in energy goods prices. Food prices surged 1.1%, with egg prices soaring 44% amid an avian flu outbreak. Excluding food and energy, goods prices edged up 0.1% for the second consecutive month.

Services rose 0.3% following a 0.5% increase in December. A 5.7% surge in wholesale prices for hotel and motel rooms accounted for over a third of the services increase. Other components showing increases included automobile retailing, freight transportation, food and alcohol retailing, apparel, jewelry, footwear, and accessories, as well as bundled wired telecommunications. However, margins for fuels and lubricants retailing fell by 9.8%.

Financial markets have pushed back rate cut expectations to September from June. However, some economists believe that further easing is unlikely, citing robust domestic demand and a stable labor market.

Fed Chair Jerome Powell told lawmakers on Wednesday that "we are close but not there on inflation," adding "we want to keep policy restrictive for now," as reported by Reuters. The Fed held its benchmark overnight interest rate steady in January at 4.25%-4.50%, having already cut the rate by 100 basis points since September, when it began its easing cycle. The policy rate was hiked by a total of 5.25 percentage points in 2022 and 2023 to combat inflation.

The Trump administration's fiscal, trade, and immigration policies are seen as potential contributors to inflation. While a 25% tariff on goods from Canada and Mexico was suspended until March, a 10% additional tariff on Chinese goods took effect this month.

A separate report from the Labor Department showed that initial claims for state unemployment benefits fell 7,000 to a seasonally adjusted 213,000 for the week ending February 8, reinforcing the stability of the labor market. Economists had predicted 215,000 claims for the latest week.

Jobless claims have trended lower this year, consistent with historically low layoffs and supporting the ongoing economic expansion. However, employment opportunities for those who lose their jobs are not as plentiful as they were a year ago, as businesses adopt a wait-and-see approach. Nonfarm payrolls increased by 143,000 jobs in January, while the unemployment rate stood at 4.0%.

The number of people receiving benefits after an initial week of aid, an indicator of hiring, declined 36,000 to a seasonally adjusted 1.850 million during the week ending February 1.