Producer Price Index Sees Increase
WASHINGTON — Wholesale prices in the United States picked up in January, indicating that inflation pressures in the economy are still elevated. According to the Labor Department, the producer price index, which tracks inflation before it reaches consumers, rose 0.3% from December to January. This follows a decrease of -0.1% from November to December. On a yearly basis, producer prices increased by a mild 0.9% in January.
‘Core’ Wholesale Prices also Climbing
Excluding volatile food and energy costs, “core” wholesale prices rose 0.5%, the largest increase since July of last year. Compared to the previous month, core prices climbed 2%, up from 1.7%. The public frustration with inflation has become a central issue in President Joe Biden’s re-election bid. While measures of inflation have fallen from their peak, average prices are still approximately 19% higher than when Biden took office.
Factors Driving the Increase
Some of the rise in producer prices can be attributed to measurement quirks, such as an increase in the cost of financial management services by 5.5% from December to January. Additionally, many companies implement price increases at the beginning of the year, which often boosts overall inflation measures in January. However, the costs of hospital care, doctor visits, and hotel stays also surged in January, indicating that inflation in travel, healthcare, and other service industries remains elevated.
Implications for the Federal Reserve
The latest figures are expected to reinforce the Federal Reserve’s cautious approach to cutting its benchmark interest rate. Fed officials are likely to monitor several more months of data to ensure the continuation of a downward trend in inflation. The wholesale figures follow a report showing that consumer prices eased less than expected last month, suggesting that the pandemic-fueled inflation surge is gradually coming under control.
Fed’s Preferred Price Measure
Some of the data released on Friday is used to calculate the Fed’s preferred price measure, which will be reported later this month. This measure has been running below the more well-known consumer price index. Economists forecast that when core prices in the Fed’s preferred gauge are reported, they will have jumped by as much as 0.4% or 0.5%, a pace much faster than the Fed’s inflation target.
Conflicting Views on Inflation
Fed officials have expressed optimism that inflation is headed lower. However, some remain cautious about whether inflation is declining to the Fed’s 2% objective. The possibility of high borrowing rates being deemed unnecessary if inflation returns to the target level has been raised. Instead, the Fed would be expected to cut rates, making consumer and business loans more affordable.
Rate Cut Expectations
Wall Street traders and economists had initially expected the Fed to implement its first rate cut in March. However, Federal Reserve Chair Jerome Powell indicated that a cut that month was unlikely. He stated that the Fed needed greater confidence in sustainable inflation before reducing rates. Most economists now anticipate a rate cut in May or June.