By Lucia Mutikani
WASHINGTON (Reuters) – U.S. 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. 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 Fed will not see any argument for pushing interest rates lower, sooner, in today’s figures,” said Carl Weinberg, chief economist at High Frequency Economics. “However, there is no reason to expect the Fed to debate hiking rates in these figures either.”
The producer price index for final demand rose 0.4% last month after an upwardly revised 0.5% gain in December, the Labor Department’s Bureau of Labor Statistics (BLS) said. Economists polled by Reuters had forecast the PPI rising 0.3%.
In the 12 months through January, the PPI advanced 3.5% 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% after rising 0.5% in December. More than half of the increase came from a 1.7% jump in energy goods prices. Food prices shot up 1.1%. Excluding food and energy, goods prices edged up 0.1% for a second straight month.
Services increased 0.3% after climbing 0.5% in December. A 5.7% 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%. Portfolio management fees rose 0.4%, but airline fares decreased 0.3%. Physician care prices declined 0.5% and the cost of hospital inpatient care fell 0.3%.
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 its 2% inflation target.
With the CPI and PPI data in hand, economists estimated that the core PCE price index rose 0.3% in January after gaining 0.2% in December. That was much lower than the 0.5% gain some had forecast following the CPI data. Core inflation was forecast increasing 2.6% after rising 2.8% in December.
U.S. Treasury yields slipped. The dollar fell against a basket of currencies.
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%-4.50% 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% tariff on goods from Canada and Mexico was suspended until March. But a 10% additional tariff on Chinese goods went into effect this month.
Labor market stability was confirmed by a separate report from the Labor Department on Thursday 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. That is 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%.
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.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)
