U.S. producer prices increased more than expected in April amid strong gains in the costs of services like portfolio management and hotel accommodation, indicating that inflation remained stubbornly high early in the second quarter.
The report from the Labor Department on Tuesday also showed wholesale goods prices rising solidly last month, though the cost of food declined. It followed recent surveys showing an increase in inflation expectations, prompting traders to trim bets for a September interest rate cut from the Federal Reserve.
“Inflation at the producer level is back on the front burner this month and consumers are sure to feel the heat as higher production costs will feed into the inflation they see in the goods and services they buy,” said Christopher Rupkey, chief economist at FWDBONDS. “If Fed officials were seeking some moderation from the inflation outbreak in the first quarter, it is not showing up at the start of the second quarter.”
The producer price index for final demand rose 0.5 per cent last month after falling by a downwardly revised 0.1 per cent in March, the Labor Department’s Bureau of Labor Statistics said.
Economists polled by Reuters had forecast the PPI gaining 0.3 per cent after a previously reported 0.2 per cent rise in March. A 0.6 per cent jump in services accounted for nearly three-quarters of the increase in the PPI. April’s rise was the largest since July 2023 and followed a 0.1 per cent dip in March. In the 12 months through April, the PPI increased 2.2 per cent after climbing 1.8 per cent in March.
Inflation surged in the first quarter amid strong domestic demand after slowing for much of last year. Economists had largely attributed the rise to a combination of businesses raising prices at the start of the year and providers of services like motor vehicle insurance catching up to higher costs. They are optimistic that inflation will resume its downward trend this quarter as the labour market is cooling.
That hope was shared by Fed Chair Jerome Powell who said at a banking event in Amsterdam that “I expect that inflation will move back down … on a monthly basis to levels that were more like the lower readings that we were having last year.” Powell, however, added that “I would say my confidence in that is not as high as it was.”
Stocks on Wall Street were trading higher. The dollar slipped versus a basket of currencies. U.S. Treasury prices rose. Financial markets saw roughly 60 per cent odds of a rate cut in September, down from a 64 per cent chance before the PPI data.
Some economists believe the Fed could deliver the first rate cut in July. The U.S. central bank early this month left its benchmark overnight interest rate unchanged in the current 5.25 per cent-5.50 per cent range, where it has been since July. The Fed has raised its policy rate by 525 basis points since March 2022.
Consumer price data on Wednesday could offer fresh clues on the timing of the much-awaited rate cut.
A 0.6 per cent rise in prices of services less trade, transportation and warehousing accounted for 70 per cent of the jump in services inflation. That mostly reflected a 3.9 per cent surge in portfolio management fees amid a recent stock market rally, which followed a 0.6 per cent rise in March.
The cost of hotel and motel rooms rebounded 2.4 per cent after falling 1.4 per cent in March. The cost of transporting freight by road also rose. But wholesale airline passenger fares dropped 3.8 per cent after increasing 1.7 per cent in March. Health and medical insurance costs rose 0.2 per cent after posting a similar gain in March.
Property and casualty insurance prices edged up 0.1 per cent. That followed a 0.4 per cent increase in March.
Trade services margins, which measure changes in margins received by wholesalers and retailers, increased 0.8 per cent. But the cost of transportation and warehousing services fell 0.6 per cent.
Portfolio management fees, health care, hotel and motel accommodation, insurance and airline fares are among components that go into the calculation of the personal consumption expenditures (PCE) price indexes. The PCE price indexes are the inflation measures tracked by the Fed for it 2 per cent target.
“Margins remain 33 per cent above their 2019 average level, reflecting the outperformance of nominal GDP relative to its pre-pandemic trend,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “We expect margins to decline gradually over the next year, as households who are no longer flush with cash seek to make their dollars work harder, and retailers fight for market share.”
Goods prices rose 0.4 per cent after slipping 0.2 per cent in March. They were boosted by a 2.0 per cent increase in the prices of energy products. Wholesale gasoline prices rebounded 5.4 per cent, but natural gas prices dropped 3.2 per cent. Food prices fell 0.7 per cent.
Excluding food and energy, goods prices rose 0.3 per cent after being unchanged in March. The narrower measure of PPI, which strips out food, energy and trade services components, advanced 0.4 per cent in April after rising 0.2 per cent in March. The core PPI increased 3.1 per cent year-on-year, the largest gain since April 2023, after rising 2.8 per cent in March.
Based on the PPI data, economists estimated that the core PCE price index could rise by 0.2 per cent or 0.3 per cent in April after gaining 0.3 per cent in March. That would result in core inflation increasing by about 2.8 per cent year-on-year, matching March’s advance. These forecasts could change when April’s CPI data is published.
“Inflation pressures are still substantial and the momentum that built up over the last few years is still rolling along,” said Bill Adams, chief economist at Comerica Bank.