US producer inflation trends higher; labour market remains stable

December rise in the PPI revised up to 0.5% from 0.2%

US producer prices increased solidly in January, offering more evidence inflation was picking up again and strengthening financial market views that the Federal Reserve would not be cutting interest rates before the second half of the year.

The broad rise in producer inflation reported by the Labor Department on Thursday followed on the heels of news on Wednesday that consumer prices accelerated by the most in nearly 1-1/2 years in January. Some details of the report, however, suggested a more moderate increase in January in the key inflation measures tracked by the US central bank for its 2 per cent target than had been anticipated in the wake of the strong CPI data.

Economists warned inflation was set to trend even higher as President Donald Trump presses ahead with broad tariffs on imports as well as mass deportations that could cause labor shortages and raise wages and prices of goods.

"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. "Tariffs continue to be threatened by the Trump administration, which would raise costs for businesses across the board." The producer price index for final demand rose 0.4 per cent last month after an upwardly revised 0.5 per cent gain in December, the Labor Department's Bureau of Labor Statistics (BLS) said. Economists polled by Reuters had forecast the PPI rising 0.3 per cent.

In the 12 months through January, the PPI advanced 3.5 per cent after increasing by the same margin in December. With January's PPI report, the BLS updated weights to reflect price movements in 2024, and seasonal adjustment factors, the model that the government uses to iron out seasonal fluctuations from the data.

The rise in the PPI was across goods and services. Wholesale goods prices jumped 0.6 per cent after rising 0.5 per cent in December. More than half of the increase came from a 1.7 per cent jump in energy goods prices. Food prices shot up 1.1 per cent, with egg prices soaring 44.0 per cent amid an avian flu outbreak. Excluding food and energy, goods prices edged up 0.1 per cent for a second straight month.

Services increased 0.3 per cent after climbing 0.5 per cent in December. A 5.7 per cent surge in wholesale prices of hotel and motel rooms accounted for more than a third of the increase in services.

There were also increases in wholesale prices of automobile retailing, transportation of freight by road, food and alcohol retailing as well as apparel, jewelry, footwear and accessories retailing and bundled wired telecommunications.

But margins for fuels and lubricants retailing fell 9.8 per cent.

Portfolio management fees rose 0.4 per cent, while airline fares decreased 0.3 per cent. Physician care prices declined 0.5 per cent and the cost of hospital inpatient care fell 0.3 per cent. Hospital outpatient care prices declined 0.4 per cent.

Portfolio management fees, healthcare, hotel and motel accommodation and airline fares are among the components that go into the calculation of the personal consumption expenditures (PCE) price index, excluding food and energy, one of the measures tracked by the Fed for monetary policy.

With the CPI and PPI data in hand, economists' estimates for the increase in the core PCE price index in January ranged from 0.2 per cent to 0.3 per cent. That was lower than the 0.4 per cent gain most had forecast after the CPI data. Core inflation climbed 0.2 per cent in December. It was forecast increasing 2.6 per cent year-on-year in January, down from the 2.7 per cent estimated following the CPI report.

Annual core inflation was 2.8 per cent in December.

"The Fed still can declare, therefore, that progress in returning inflation to its 2 per cent objective is still being made," said Samuel Tombs, chief US economist at Pantheon Macroeconomics.

Stocks on Wall Street rose as investors focused on the anticipated tame core PCE inflation readings. The dollar fell against a basket of currencies. US Treasury yields slipped.

STABLE LABOR MARKET

Financial markets have pushed back rate cut expectations to September from June, though some economists believe the window for further policy easing has closed, citing strong domestic demand and a stable labor market.

Fed Chair Jerome Powell told lawmakers on Wednesday "we are close but not there on inflation," adding "we want to keep policy restrictive for now."

The Fed left its benchmark overnight interest rate unchanged in the 4.25 per cent-4.50 per cent range in January, having reduced it by 100 basis points since September, when it launched its policy easing cycle. The policy rate was hiked by 5.25 percentage points in 2022 and 2023 to tame inflation.

The Trump administration's fiscal, trade and immigration policies are seen fanning inflation. A 25 per cent tariff on goods from Canada and Mexico was suspended until March. But a 10 per cent additional tariff on Chinese goods went into effect this month.

Labor market stability was confirmed by a separate report from the Labor Department showing initial claims for state unemployment benefits fell 7,000 to a seasonally adjusted 213,000 for the week ended February 8.

Economists had forecast 215,000 claims for the latest week.

Claims have trended lower so far this year, consistent with historically low layoffs and helping to underpin the economic expansion. Nonetheless, employment opportunities for those who lose their jobs are no longer as abundant as they were a year or so ago, with businesses adopting a wait and see attitude.

Nonfarm payrolls increased by 143,000 jobs in January, while the unemployment rate was at 4.0 per cent.

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

"The business sector remains in wait-and-see mode to see what, if any, disruptions there may be for global supply chains as price uncertainty makes it more difficult to expand operations," said Ben Ayers, senior economist at Nationwide.  (Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)