US producer inflation steady, labour market stable amid tariff risks

US producer prices were unchanged in February for the first time in seven months, while fewer Americans filed claims for unemployment benefits last week, pointing to a stable economy that should allow the Federal Reserve to keep interest rates steady next Wednesday. 

But the calm painted by the reports from the Labor Department on Thursday could be upended by radical government spending cuts, which have pushed thousands of federal employees and contractors out of work, and an escalating trade war stemming from broad import tariffs. 

The aggressive policies pursued by President Donald Trump's administration have sent business and consumer confidence plummeting, and raised the chances of a recession. US airlines have cut their earnings estimates noting that corporations and consumers were scaling back spending because of mounting economic uncertainty. 

"No factory inflation and no worrisome job layoffs either, so there is nothing to slow the economy's advance for now," said Christopher Rupkey, chief economist at FWDBONDS. 

"Nevertheless, the radical, buzz-saw cuts in spending and personnel down in Washington could eventually spread to the rest of the private economy in the months to come and it has already created enough uncertainty for company CEOs to potentially halt the economy's forward progress starting in the second quarter." The unchanged reading in the producer price index for final demand last month, the first since July, followed an upwardly revised 0.6 per cent increase in January, the Labor Department's Bureau of Labor Statistics said. 

Economists polled by Reuters had forecast the PPI climbing 0.3 per cent after a previously reported 0.4 per cent gain in January. In the 12 months through February, the PPI advanced 3.2 per cent after rising 3.7 per cent in January. 

But as in the consumer price index data released on Wednesday, there were unfavorable details in the PPI components that go into the calculation of the Personal Consumption Expenditures (PCE) price indexes, tracked by the US central bank for its 2 per cent inflation target. 

Goods prices rose 0.3 per cent, with a 53.6 per cent surge in wholesale egg prices accounting for two-thirds of the increase. Goods prices rose 0.6 per cent in January. A raging bird flu outbreak is driving egg prices higher, boosting the cost of food. Wholesale food prices shot up 1.7 per cent after increasing 1.0 per cent in January. 

Energy prices fell 1.2 per cent. Excluding the volatile food and energy components, goods prices jumped 0.4 per cent, the largest rise in two years. The so-called core goods prices gained 0.2 per cent in January. Economists said it was likely that companies were raising prices ahead of tariffs. 

President Donald Trump has ignited a trade war, raising tariffs on goods from China to 20 per cent, with Beijing retaliating with duties of its own. 

Trump imposed a new 25 per cent duty on Canadian and Mexican imports, before providing a one-month exemption for goods that meet the rules of origin under the US-Mexico-Canada Agreement on trade. Enhanced steel and aluminum tariffs drew swift retaliation from Europe and Canada. 

Trump on Thursday threatened a 200 per cent tariff on wine, cognac and other alcohol imports from Europe. Economists expect the deluge of tariffs to impact upcoming inflation data. 

Stocks on Wall Street traded lower. The dollar advanced against a basket of currencies. US Treasury yields fell. 

SERVICES PRICES FALL 

The cost of services fell 0.2 per cent amid a 1.4 per cent decline in margins for machinery and vehicle wholesaling, after rising 0.6 per cent in January. There were also decreases in the margins for food and alcohol, automobiles and automobile parts as well as apparel, footwear, and accessories retailing. 

But prices for hospital inpatient care jumped 1.0 per cent, while the cost of outpatient services rebounded 0.3 per cent. Portfolio management fees rose 0.5 per cent, while airline fares were unchanged. 

Hotel and motel accommodation prices dipped 0.1 per cent. 

Portfolio management fees, healthcare, hotel and motel accommodation and airline fares are among the components that go into the calculation of the core PCE price index. 

Economists estimated the core PCE price index increased 0.3 per cent in February, with high odds of rounding up to 0.4 per cent. Core PCE inflation gained 0.3 per cent in January. It was forecast rising 2.7 per cent year-on-year after advancing 2.6 per cent in January. 

The Fed is expected to keep its benchmark overnight interest rate in the 4.25 per cent-4.50 per cent range next Wednesday, having reduced it by 100 basis points since September. 

Financial markets expect the Fed to resume cutting borrowing costs in June after it paused its easing cycle in January amid a darkening economic outlook. The policy rate was hiked by 5.25 percentage points in 2022 and 2023 to tame inflation. 

A separate report from the Labor Department showed initial claims for state unemployment benefits slipped 2,000 to a seasonally adjusted 220,000 for the week ended March 8. 

Risks for the labor market are, however, skewed to the downside. Thousands of federal government workers, mostly on probation, have been fired by tech billionaire Elon Musk's Department of Government Efficiency, or DOGE, an entity created by Trump to drastically shrink the government. 

Unions representing some of the civil servants have challenged the layoffs, resulting in reinstatements. Agencies have a Thursday deadline to submit plans for large-scale layoffs. The federal government upheaval has not yet significantly filtered through to official labor market data. 

A federal judge on Thursday ordered six agencies, including Veterans Affairs, to reinstate thousands of recently hired employees who have been fired. 

A separate unemployment compensation for federal employees (UCFE) program, which is reported with a one-week lag, showed applications easing 54 to 1,580. 

"With all the gyrations between DOGE, agency cuts, and the courts, the number of federal employees already going without a paycheck is unclear," said Andrew Stettner, a senior fellow at the Century Foundation. "What we know ... is that the cruel way in which Trump is cutting government payrolls is making it hard for laid-off federal employees to get benefits." Spending cuts have, however, impacted contractors and nonprofits, lifting claims in Washington D.C., Maryland and Virginia. 

The number of people receiving benefits after an initial week of aid, a proxy for hiring, decreased 27,000 to a seasonally adjusted 1.870 million during the week ending March 1, the claims report showed.

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