Wholesale prices in the United States experienced a significant surge in January, indicating that the battle against inflation may continue to be challenging. The producer-price index (PPI) rose by 0.3% last month, surpassing economists’ forecast of 0.1%. Additionally, core wholesale prices, which exclude food, energy, and trade margins, increased by an even sharper 0.6%, marking the largest rise in a year.
While the rise in wholesale inflation over the past 12 months decreased to 0.9% from 1%, the 12-month rate of core wholesale inflation remained unchanged at 2.6%. This suggests that inflation tends to first manifest at the wholesale level before impacting consumers. Unfortunately, this news follows a disappointing increase in the consumer-price index (CPI) in January, indicating that inflation may not easily reach the Federal Reserve’s target of 2%.
Both the CPI and PPI reports are crucial factors that influence the Fed’s preferred inflation tracker, the personal consumption expenditures index (PCE). Economists anticipate that the January PCE report will reveal an elevated inflation reading when released in two weeks, further fueling concerns about persisting inflation.
While inflation is expected to decrease in 2024, both the CPI and PPI price gauges indicate that the path towards the central bank’s goal will likely be “bumpy,” as stated by Raphael Bostic, president of the Atlanta Federal Reserve Bank. Consequently, Wall Street does not anticipate the Fed making its first interest rate cut until late spring or summer.
The cost of services, which is the main driver of U.S. inflation, rose by 0.6% in January. Wholesale prices for medical care, financial advice, legal services, and travel arrangements all experienced increases. Although the PPI is designed to account for annual price adjustments, its estimates are not always accurate. Nonetheless, service inflation has considerably slowed over the past year, with wholesale service prices rising by 2.2% during that period.
On the other hand, the cost of wholesale goods has been falling for the past four months, declining by 1.7% over the past 12 months. The decrease is primarily driven by falling gasoline prices. Looking ahead, the outlook for inflation further down the pipeline appears to be more benign. The wholesale cost of partly finished goods slightly decreased last month and is 3.8% lower compared to a year ago. Additionally, the cost of raw materials is down by a sharper 15% compared to the previous year.
Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance, noted that the two strong inflation reports emphasize the need for the Fed to proceed cautiously with interest rate cuts. The release of the PPI report led to a decline in the Dow Jones Industrial Average and the S&P 500 in Friday’s trading. Additionally, the yield on the 10-year Treasury note increased by 5 basis points to 4.31%.
In conclusion, the recent surge in wholesale prices indicates that the battle against inflation in the United States may continue. While inflation is expected to decrease in the future, both the CPI and PPI reports suggest that the journey towards the Federal Reserve’s target may be challenging. The cost of services, which is the main driver of U.S. inflation, rose in January, while wholesale goods prices have been falling. However, the outlook for inflation further down the pipeline appears to be more favorable. These developments have influenced market reactions, with stocks opening lower and Treasury yields increasing.
