US producer prices accelerate in another sign of inflation dangers

US producer prices jumped more than expected at the start of the year, reinforcing the case for the Federal Reserve to more rapidly remove the economic stimulus it has provided since the early days of the pandemic.

The producer price index, which tracks the prices businesses receive for their goods and services, rose 1 per cent in January, the Bureau of Labor Statistics said on Tuesday – the biggest gain in eight months. That was well above the 0.4 per cent rise registered in the previous period and double what economists had forecast.

The large monthly gain translated to an annual increase of 9.7 per cent, in line with December’s surge. Last year was the largest calendar year increase in wholesale inflation since the data were first compiled in 2010.

Once volatile items such as food, energy and trade are stripped out, so-called core producer prices increased 0.9 per cent between December and January, or 6.9 per cent on a year-over-year basis. In December, those prices were 0.4 per cent higher month on month, or 7 per cent higher compared to the same time last year.

“There is not a lot of good news in here on the inflation front,” said Kathy Jones, chief fixed-income strategist at Charles Schwab. “It is running very high. Goods prices really continue to drive it, but services are rising as well. ”

The data come on the heels of another alarming inflation report, which last week showed US consumer prices climbing at the fastest annual pace in 40 years, at 7.5 per cent. High inflation has been an obstacle for President Joe Biden’s economic agenda as well as the Fed.

The BLS characterized January’s price increases as “broad-based”, adding to concerns that inflationary pressures are no longer contained to the hardest sectors hit by the pandemic and instead appear at greater risk of becoming entrenched.

Expenses tied to retail services and those related to travel accommodation and freight transportations saw notable gains, as did fuel costs. Natural gas prices decreased for the month.

Investors have increased bets that the central bank will respond forcefully in an attempt to tame inflation, with some speculating at one point the Fed would convene an unscheduled meeting to raise interest rates prior to the next planned gathering in mid-March. The Fed is highly unlikely to make such a move, however, given it typically reserves emergency adjustments for acute crises.

An increasing number of Wall Street economists have penciled in a half-point interest rate rise next month. However, market pricing suggests traders broadly expect the central bank to stick to its typical cadence of quarter-point increases and deliver roughly seven such moves this year.

Fed officials appear split on how exactly to proceed after March, with Mary Daly, president of the San Francisco branch, on Sunday advocating for the central bank to be “measured” in its approach.

James Bullard, president of the St Louis Fed and a voting member on the policy-setting Federal Open Market Committee, on Monday reiterated his call for a more rapid withdrawal of policy support and backed a 1 percent point increase in the federal funds rate by July .

The Fed has maintained its benchmark interest rate at a range of 0 to 0.25 per cent since 2020.

Jones reckoned the Fed would raise interest rates four times “relatively quickly” from March, before shifting its focus to scaling back its nearly $ 9tn balance sheet. Discussions were under way about the exact pace, which Jones said gave the Fed “a lot of optionality” to manage financial conditions.

“When I look at policy, it is not just about rate hikes, but it is how the Fed approaches this from a one-two punch of rate hikes and balance sheet reduction,” she said.

US markets were little moved by the latest PPI figures, with news earlier in the day that Russia would pull back some of its troops on the border of Ukraine propelling a gain in equity futures.

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