The new data on producer prices released on Friday is not a good sign for containing inflation. Prices paid by American producers rose at the fastest rate in months in January, especially the core metric that strips out food and energy.
Underlying inflation on an annual basis is now well above 3%, consistent with our current forecast. This elevated rate will almost certainly put more pressure on the personal consumption expenditures index, the Fed’s preferred measure of inflation.
Friday’s data confirms that there is no rationale for rate cuts in the short term, barring an unexpected shock. In our opinion, July would most likely be the earliest date to revisit rate-cut conditions.
From now until July, we see more tailwinds for spending than headwinds and, as a result, more reasons for inflation to pick up than to fall.
One reason producers were able to raise prices so sharply in January was the resilience of spending, even with tariffs in place.
After being reluctant to pass most of the tariff increases on to consumers last year, producers now appear more comfortable adjusting prices higher as uncertainty eases and the fear of consumer pushback diminishes.
At the same time, the inventories built up ahead of tariffs last year may have largely dried up by now. Any new shipments of inventory are most likely coming at a higher cost—not only because of tariffs, but also because of a weaker dollar.
The data
Producer prices at the top line remained firm in January, with total final demand rising by 0.5% on the month, up from 0.4% in December and marking a steady acceleration from the soft readings in October and November.
On a year-over-year basis, final demand was up by 2.9%, while the core measure excluding food, energy and trade rose by 0.3% in January and now stands at a stronger 3.4% on an annual basis.
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The higher prices continue to be driven by services, which increased by 0.8% on the month and by 3.4% year over year, with trade services jumping by 2.5% in January alone.
By contrast, goods prices declined by 0.3%, held down by sharp drops in food and energy, but core goods excluding food and energy rose by 0.7% in January and by 4.2% year over year.
The takeaway
While headline inflation was supported by services and trade margins, underlying core components remain firm, reinforcing the broader inflation pressure in the pipeline.
