WASHINGTON, Feb 27 (Reuters) – U.S. producer prices accelerated in January, with the cost of goods outside food and energy increasing by the most in more than 3-1/2 years as businesses passed on import tariffs and raised prices at the start of the year.
The stronger-than-expected increase in the Producer Price Index reported by the Labor Department on Friday reinforced economists’ expectations that the Federal Reserve would not resume cutting interest rates before June.
The PPI was boosted by a widening in margins, including for professional and commercial equipment wholesaling as well as apparel, footwear, and accessories retailing. Some components, including domestic airfares and healthcare, which go into the calculation of the Personal Consumption Expenditures price indexes, the inflation measures tracked by the U.S. central bank for its 2% target, increased solidly last month.
Economists continued to expect that the so-called core PCE inflation, excluding the volatile food and energy components, maintained a strong pace of increase in January.
“Wider margins for producers could add some upside for consumer costs in coming months as firms pass along higher costs for services,” said Ben Ayers, senior economist at Nationwide. “Given still-buoyant core inflation and the recent firming of job gains, we expect the Fed to remain on pause during its upcoming March meeting.”
The PPI for final demand rose 0.5% last month after advancing by a downwardly revised 0.4% in December, the Labor Department’s Bureau of Labor Statistics said. Economists polled by Reuters had forecast the PPI gaining 0.3% after a previously reported 0.5% increase in December.
In the 12 months through January, the PPI increased 2.9% after rising 3.0% in December. The moderation in the year-on-year producer inflation rate reflected last year’s high readings dropping out of the calculation. The report was delayed by the brief shutdown of the federal government early this month.
A 0.8% jump in services drove the rise in the monthly PPI, reflecting a 2.5% increase in trade services, which measure changes in margins received by wholesalers and retailers. Margins for professional and commercial equipment wholesaling surged 14.4%, indicating businesses were passing on tariffs.
Prices also rose for chemicals and allied products wholesaling, bundled wired telecommunications access services, health, beauty and optical goods retailing, and food and alcohol retailing. Transportation and warehousing services prices climbed 1.0%, but the cost of services less trade, transportation, and warehousing was unchanged.
TARIFF-RELATED PRICE INCREASES
“The problem last month appeared to be tariff-related,” said Paul Ashworth, chief North America economist at Capital Economics. “If we exclude trade and transportation, other core services prices were unchanged.”
The U.S. Supreme Court last Friday struck down President Donald Trump’s sweeping tariffs, which he had pursued under a law meant for use in national emergencies. However, Trump swiftly imposed a 10% global tariff for 150 days to replace some of the emergency duties, before raising the rate to 15%.
U.S. stocks opened lower. The dollar was steady against a basket of currencies. U.S. Treasury yields fell.
Within services, airline fares increased 2.6% and the cost of portfolio management fees rose 1.5%. Prices for physician care soared 0.8%, but the cost of hospital outpatient care fell 0.9% while inpatient care increased 0.2%. The wholesale cost of hotel and motel rooms decreased 4.1%. These are among the components that feed into the core PCE inflation.
Producer goods prices fell 0.3%, with the cost of energy declining 2.7% amid a 5.5% drop in gasoline. Wholesale food prices decreased 1.5%, pulled down by a 10.5% plunge in fresh fruits and melons. The Trump administration has rolled back some tariffs on fruit and vegetables, including bananas, to lower costs for consumers. Egg prices crashed 63.9%, but the cost of beef and veal increased 1.1%.
Excluding food and energy, goods prices vaulted 0.7%, the biggest gain since May 2022, after rising 0.4% in December. Core goods prices advanced 4.2% year-on-year, the largest gain since March 2023. Economists continued to believe that core PCE inflation increased by as much as 0.5% in January, which would translate to a year-on-year advance of 3.2%.
Core PCE inflation rose 0.4% in December and increased 3.0% year-on-year. The government will publish the delayed PCE inflation report for January on March 13.
“This report validates the pivot of the Fed away from labor market risks,” said Carl Weinberg, chief economist at High Frequency Economics. “Market participants who have not already marked down their expectations for Fed rate cuts this year will be busy adjusting their books today.”
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci )
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