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. Traders trimmed their expectations 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% last month after falling by a downwardly revised 0.1% in March, the Labor Department's Bureau of Labor Statistics said on Tuesday.
Economists polled by Reuters had forecast the PPI gaining 0.3% after a previously reported 0.2% rise in March. A 0.6% 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 0.1% dip in March. In the 12 months through April, the PPI increased 2.2% after climbing 1.8% in March.
Inflation surged in the first quarter amid strong domestic demand after slowing for much of last year. Economists are optimistic that prices will resume their downward trend this quarter as the labor market is cooling.
CPI DATA IN FOCUS
Financial markets saw a roughly 60% chance of a rate cut in September, down from a 64% 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%-5.50% 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.
U.S. stocks opened lower. The dollar slipped against a basket of currencies. U.S. Treasury prices rose.
A 0.6% rise in prices of services less trade, transportation and warehousing accounted for 70% of the jump in services inflation. That mostly reflected a 3.9% surge in portfolio management fees amid a recent stock market rally, which followed a 0.6% rise in March.
The cost of hotel and motel rooms rebounded 2.4% after falling 1.4% in March. The cost of transporting freight by road also rose. But wholesale airline passenger fares dropped 3.8%. Health and medical insurance costs rose 0.2% after posting a similar gain in March.
Trade services margins, which measure changes in margins received by wholesalers and retailers, increased 0.8%. But the cost of transportation and warehousing services fell 0.6%.
Portfolio management fees, healthcare, hotel and motel accommodation, 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% target.
Goods prices also rose solidly, gaining 0.4% after slipping 0.2% in March. They were boosted by a 2.0% increase in the prices of energy products. Food prices fell 0.7%.
Excluding food and energy, goods prices rose 0.3% after being unchanged in March.
The narrower measure of PPI, which strips out food, energy and trade services components, advanced 0.4% in April after rising 0.2% in March. The core PPI increased 3.1% year-on-year, the largest gain since April 2023, after rising 2.8% in March.
