WASHINGTON- US 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 percent last month after falling by a downwardly revised 0.1 percent in March, the Labor Department’s Bureau of Labor Statistics said.
Economists polled by Reuters had forecast the PPI gaining 0.3 percent after a previously reported 0.2 percent rise in March. A 0.6 percent 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 percent dip in March. In the 12 months through April, the PPI increased 2.2 percent after climbing 1.8 percent 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 labor 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. US Treasury prices rose. Financial markets saw roughly 60 percent odds of a rate cut in September, down from a 64 percent chance before the PPI data.
Some economists believe the Fed could deliver the first rate cut in July. The US central bank early this month left its benchmark overnight interest rate unchanged in the current 5.25 percent -5.50 percent 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 percent rise in prices of services less trade, transportation and warehousing accounted for 70 percent of the jump in services inflation. That mostly reflected a 3.9 percent surge in portfolio management fees amid a recent stock market rally, which followed a 0.6 percent rise in March.
The cost of hotel and motel rooms rebounded 2.4 percent after falling 1.4 percent in March. The cost of transporting freight by road also rose. But wholesale airline passenger fares dropped 3.8 percent after increasing 1.7 percent in March. Health and medical insurance costs rose 0.2 percent after posting a similar gain in March.
Property and casualty insurance prices edged up 0.1 percent . That followed a 0.4 percent increase in March.
Trade services margins, which measure changes in margins received by wholesalers and retailers, increased 0.8 percent . But the cost of transportation and warehousing services fell 0.6 percent .
Portfolio management fees, healthcare, 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 percent target.
