U.S. producer prices rose more than expected in January, reinforcing concerns about inflationary volatility that could prompt the Federal Reserve to hold interest rates longer to slow the economy.
The producer price index, often considered a key indicator of where consumer inflation is headed in the coming months, rose 0.7 percent last month from December, the U.S. Bureau of Labor Statistics said Friday. That beat economists’ expectations for a 0.4 percent increase.
Annually, the PPI, which tracks the prices paid to US producers for goods and services, rose 6 percent from a year ago. That marked a moderation from 6.5 percent in December, but came above market forecasts for 5.4 percent.
The PPI figure came a day after consumer price data showed inflation slowed only slightly in January. New job growth and retail sales also remained strong despite the Fed’s efforts to cool the economy with high interest rates, which this month rose to a range of 4.5 to 4.75 percent.
Almost two weeks ago, a blockbuster non-farm payrolls report showed the US economy added more than half a million jobs in January and the unemployment rate fell to a 53-year low of 3.4 percent. Days later, Fed chairman Jay Powell warned that rates may have to rise higher than investors expected because the strong labor market could obviously take it back for inflation to return to the central bank’s 2 percent target.
Ahead of the release of jobs data in early February, futures markets expected the central bank’s key rate to rise below 5 percent, and the price of two 0.25 percent interest rate cuts by the end of the year. Investors now expect the rate to rise to around 5.25 percent, and estimate the possibility of one or no cuts by the end of the year.
US stock markets and government bonds sold off on Thursday after the PPI data, as well as figures showing the number of Americans who filed jobless claims last week remained close to historic highs.
The S&P 500 was down 0.6 percent in lunch trade, as Wednesday’s expected stronger-than-expected retail sales data. The yield on the two-year US Treasury interest rate rose 0.01 percentage points to 4.64 percent, staying close to the three-month high struck in the previous session.
“I think Powell put it right last week when he said that the difference between the Fed’s outlook and the market’s is mainly the difference in how quickly each thinks inflation will come down,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott. “At the margin, the January CPI tilted the argument slightly in favor of the Fed and away from the market, but only slightly.”
Adding to the evidence of the strength of the domestic labor market, new applications for state unemployment assistance, a proxy for layoffs, totaled 194,000 in the week ending February 11 on a seasonal basis. That was down from a revised 195,000 the previous week, the labor department said on Thursday.
Weekly jobless claims have remained below 200,000 since mid-January. The last time applications remain below that threshold for a longer period is in April 2022.
Fed Governor Michelle Bowman said last week that although some components of inflation have moderated, the persistently tight labor market is adding to inflationary pressures.
Other parts of the economy are feeling the effects of higher rates. Data on Thursday showed the rate of new home construction in the US fell to the lowest level since the early stages of the Covid-19 pandemic as higher mortgage rates have dampened demand. Separately, the index of manufacturing activity tracked by the Philadelphia branch of the Fed fell to a reading of minus 24.3 in February, the lowest level since May 2020.
The combination of this week’s producer price and consumer price inflation report “suggests the easy battle against price pressures has been won”, said John Lynch, chief investment officer at Comerica Wealth Management.
“The move from 9 percent to 6 percent will prove to be more challenging than the trip from 6 percent to 3 percent,” Lynch said of the rate of price inflation.