U.S. producer prices rose more than anticipated in April, fueled by significant increases in services such as portfolio management and hotel accommodations, suggesting persistent inflationary pressures into the second quarter. The Labor Department reported on Tuesday that while wholesale goods prices saw a solid increase, food prices declined. This has led traders to lower their expectations for a Federal Reserve rate cut in September.
Christopher Rupkey, chief economist at FWDBONDS, commented, “Inflation at the producer level is back on the front burner this month, and consumers will inevitably feel the impact as higher production costs translate into the prices of goods and services.”
The Producer Price Index for final demand increased by 0.5% in April, following a revised drop of 0.1% in March, according to the Bureau of Labor Statistics. This rise, led predominantly by a 0.6% increase in services, marked the most significant monthly increase since July 2023 and contrasts with the modest 0.1% decline seen in March. Over the last 12 months through April, the PPI has risen 2.2%, accelerating from 1.8% in March.
Amid robust domestic demand, inflation surged in the first quarter. However, economists are hopeful that inflation will moderate as signs of cooling appear in the labor market.
Following the release of the PPI data, financial markets adjusted their expectations, with the likelihood of a September rate cut falling to about 60% from 64%. The Federal Reserve has maintained its benchmark overnight interest rate at a range of 5.25%-5.50% since July, after a cumulative increase of 525 basis points since March 2022.
Additional economic indicators are on the horizon, with consumer price data set to be released on Wednesday, potentially offering further insights into the Fed’s future rate decisions.
On the markets, U.S. stocks opened lower, the dollar weakened against major currencies, and Treasury prices increased. Significant contributors to the rise in service prices included a 3.9% jump in portfolio management fees and a 2.4% increase in hotel room costs. Conversely, airline fares saw a notable decrease.
The broader goods sector also showed strength, with a 0.4% rise overall, led by a 2.0% hike in energy product prices. Excluding volatile food and energy components, core goods prices rose by 0.3%.
The core PPI, excluding food, energy, and trade services, advanced 0.4% in April, showing a year-on-year increase of 3.1%, the highest since April 2023. This sustained growth underscores the ongoing challenges in curbing inflation to meet the Federal Reserve’s 2% target.
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