U.S. producer prices increased more than expected in January amid strong gains in the costs of services such as hospital outpatient care and portfolio management, heightening fears that inflation was picking up after months of cooling.
The increase reported by the Labor Department on Friday was the largest in five months. The report followed on the heels of an increase in consumer prices in January and prompted financial markets to dial back expectations that the Federal Reserve would start cutting interest rates in June. Data on Thursday also showed prices of imported goods surging in January.
"The Fed isn't losing the inflation fight, but they aren't winning either," said Christopher Rupkey, chief economist at FWDBONDS in New York. "The data are consistent, that January is a problem month for inflation."
The producer price index for final demand rose 0.3% last month, the largest increase since August 2023, after declining by a revised 0.1% in December, the Labor Department's Bureau of Labor Statistics said. Economists polled by Reuters had forecast the PPI gaining 0.1% following a previously reported 0.2% drop.
In the 12 months through January, the PPI increased 0.9% after climbing 1.0% in December.
Services increased 0.6%, the largest rise since July 2023, boosted by a 2.2% jump in hospital outpatient care. Portfolio management fees surged 5.5% after rising 1.4% in December. There were also increases in wholesale prices of hotel and motel rooms as well as legal services. But the cost of transporting freight by road decreased 1.0%. Services had dropped 0.1% in December.
Wholesale goods prices decreased 0.2%, declining for a fourth straight month. Food prices dropped 0.3%, while the cost of energy plummeted 1.7%.
Excluding food and energy, goods prices increased 0.3%. The so-called core goods prices gained 0.1% in December.
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 measures tracked by the Federal Reserve for its 2% inflation target.
Based on the CPI and PPI data, economists estimated the PCE price index excluding food and energy increased by about 0.4% in January after climbing 0.2% in December. In the 12 months through January, the core PCE price index was forecast increasing 2.9%, matching December's advance. The PCE inflation data is due to be released at the end of the month.
U.S. stocks opened lower. The dollar rose against a basket of currencies. U.S. Treasury prices fell.
HOUSING STARTS FALL
Financial markets still expect the U.S. central bank to deliver its first rate cut this year, though the odds of a move in June are diminishing. Since March 2022, the Fed has raised its policy rate by 525 basis points to the current 5.25%-5.50% range.
The narrower measure of PPI, which strips out food, energy and trade services components, jumped 0.6% in January after gaining 0.2% in the prior month. The core PPI increased 2.6% on a year-on-year basis, the same rate of increase as in December.
The spate of disappointing January data extended to the housing market. A separate report from the Commerce Department on Friday showed single-family homebuilding fell last month, likely because of harsh weather, but a rise in permits for future construction suggested a rebound in the coming months.
Single-family housing starts, which account for the bulk of homebuilding, dropped 4.7% to a seasonally adjusted annual rate of 1.004 million units last month, the Commerce Department's Census Bureau said. Data for December was revised up to show single-family starts falling to a rate of 1.054 million units instead of the previously reported 1.027 million units.
Extremely cold weather across much of the country during the month likely made it difficult to break ground on new projects. The below-normal temperatures helped to depress retail sales and manufacturing production in January.
Homebuilding remains supported by an acute shortage of previously owned houses on the market.
Single-family homebuilding fell in the Midwest, the densely populated South and the West. It rose in the Northeast.
Permits for future construction of single-family homes increased 1.6% to a pace of 1.015 million units last month.
Starts for housing projects with five units or more plunged 35.8% to a rate of 314,000 units in January.
Overall housing starts tumbled 14.8% to a rate of 1.331 million units in January. Economists had forecast starts would be unchanged at a rate 1.460 million units. Multi-family building permits dropped 9.0% to a rate of 405,000 units last month. Building permits as a whole slipped 1.5% to a rate of 1.470 million units last month.
