The numbers: Wholesale prices rose sharply in January in another sign that lingering inflationary pressures in the economy will keep high U.S. interest rates from falling much anytime soon.
The producer-price index increased 0.4% last month, the government said Thursday. Economists polled by The Wall Street Journal had forecast a 0.3% gain.
The increase in wholesale inflation in the past 12 months rose to 3.5% from 3.3%. That’s the highest rate in almost two years.
The PPI report follows a sharp uptick in consumer prices in January, which rattled financial markets and raised the possibility of the Federal Reserve not cutting interest rates this year.
High borrowing costs have punished home buyers and made it more expensive for people to buy cars. The cost of borrowing has also discouraged business investment.
High rates tend to slow the economy over time, however, and reduce the rate of inflation. The Fed has paused further rate cuts until it sees more evidence that inflation is decelerating again.
Key details: The core rate of wholesale inflation, which omits volatile food, energy and trade margins, rose 0.3% last month.
The 12-month core rate slipped to 3.4% from 3.5%, however.
Core inflation rates in the PPI, CPI and the Fed’s preferred PCE price index are seen as better predictors of future trends. The Fed is aiming to reduce inflation more broadly to a low 2% annual rate.
The cost of services, one of the biggest drivers of inflation in the past few years, rose for the sixth straight month and didn’t offer much relief. Service prices are up 4.1% in the past year.
The cost of wholesale goods jumped 0.6% in January, mostly because of higher oil prices.
Food prices leapt 1.1% in January, largely because of a spike in the cost of eggs. Another outbreak of the bird flu forced chicken producers to slaughter millions of birds, leading to shortages and soaring prices.
Further down the pipeline, the rising cost of raw materials appears to be one of the biggest sources of inflationary pressures.
Most of the increase has taken place in the past several months, with raw material costs up almost 9% in the past year.
Big picture: Inflation is too high to justify a further reduction in borrowing costs.
What’s still unclear is the impact of President Trump’s economic agenda. Some of his policies could boost the economy, but others — such as tariffs — threaten to raise prices and add to inflation.
Looking ahead: The “stronger-than-expected PPI helps to confirm, especially after Wednesday’s hot CPI, that inflation did indeed come roaring back in January, and makes the Federal Reserve’s path much clearer, since there is arguably zero reason to cut interest rates right now,” wrote Paul Stanley, chief investment officer of Granite Bay Wealth Management.
