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Strong services fan US producer inflation in April

Inflation hits consumer spending in Pennsylvania

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. producer prices increased more than expected in April amid strong gains in the costs of services like portfolio management and hotel accommodation, indicating that inflation remained stubbornly high early in the second quarter.

The report from the Labor Department on Tuesday also showed wholesale goods prices rising solidly last month, though the cost of food declined. It followed recent surveys showing an increase in inflation expectations, prompting traders to trim bets for a September interest rate cut from the Federal Reserve.

"Inflation at the producer level is back on the front burner this month and consumers are sure to feel the heat as higher production costs will feed into the inflation they see in the goods and services they buy," said Christopher Rupkey, chief economist at FWDBONDS. "If Fed officials were seeking some moderation from the inflation outbreak in the first quarter, it is not showing up at the start of the second quarter."

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The producer price index for final demand rose 0.5% last month after falling by a downwardly revised 0.1% in March, the Labor Department's Bureau of Labor Statistics said.

Economists polled by Reuters had forecast the PPI gaining 0.3% after a previously reported 0.2% rise in March. A 0.6% jump in services accounted for nearly three-quarters of the increase in the PPI. April's rise was the largest since July 2023 and followed a 0.1% dip in March. In the 12 months through April, the PPI increased 2.2% after climbing 1.8% in March.

Inflation surged in the first quarter amid strong domestic demand after slowing for much of last year. Economists had largely attributed the rise to a combination of businesses raising prices at the start of the year and providers of services like motor vehicle insurance catching up to higher costs. They are optimistic that inflation will resume its downward trend this quarter as the labor market is cooling.

That hope was shared by Fed Chair Jerome Powell who said at a banking event in Amsterdam that "I expect that inflation will move back down ... on a monthly basis to levels that were more like the lower readings that we were having last year." Powell, however, added that "I would say my confidence in that is not as high as it was."

Stocks on Wall Street were trading higher. The dollar slipped versus a basket of currencies. U.S. Treasury prices rose. Financial markets saw roughly 60% odds of a rate cut in September, down from a 64% chance before the PPI data.

Some economists believe the Fed could deliver the first rate cut in July. The U.S. central bank early this month left its benchmark overnight interest rate unchanged in the current 5.25%-5.50% range, where it has been since July. The Fed has raised its policy rate by 525 basis points since March 2022.

FOCUS ON CPI DATA

Consumer price data on Wednesday could offer fresh clues on the timing of the much-awaited rate cut.

A 0.6% rise in prices of services less trade, transportation and warehousing accounted for 70% of the jump in services inflation. That mostly reflected a 3.9% surge in portfolio management fees amid a recent stock market rally, which followed a 0.6% rise in March.

The cost of hotel and motel rooms rebounded 2.4% after falling 1.4% in March. The cost of transporting freight by road also rose. But wholesale airline passenger fares dropped 3.8% after increasing 1.7% in March. Health and medical insurance costs rose 0.2% after posting a similar gain in March.

Property and casualty insurance prices edged up 0.1%. That followed a 0.4% increase in March.

Trade services margins, which measure changes in margins received by wholesalers and retailers, increased 0.8%. But the cost of transportation and warehousing services fell 0.6%.

Portfolio management fees, healthcare, hotel and motel accommodation, insurance and airline fares are among components that go into the calculation of the personal consumption expenditures (PCE) price indexes. The PCE price indexes are the inflation measures tracked by the Fed for it 2% target.

"Margins remain 33% above their 2019 average level, reflecting the outperformance of nominal GDP relative to its pre-pandemic trend," said Ian Shepherdson, chief economist at Pantheon Macroeconomics. "We expect margins to decline gradually over the next year, as households who are no longer flush with cash seek to make their dollars work harder, and retailers fight for market share."Goods prices rose 0.4% after slipping 0.2% in March. They were boosted by a 2.0% increase in the prices of energy products. Wholesale gasoline prices rebounded 5.4%, but natural gas prices dropped 3.2%. Food prices fell 0.7%.

Excluding food and energy, goods prices rose 0.3% after being unchanged in March. The narrower measure of PPI, which strips out food, energy and trade services components, advanced 0.4% in April after rising 0.2% in March. The core PPI increased 3.1% year-on-year, the largest gain since April 2023, after rising 2.8% in March.

Based on the PPI data, economists estimated that the core PCE price index could rise by 0.2% or 0.3% in April after gaining 0.3% in March. That would result in core inflation increasing by about 2.8% year-on-year, matching March's advance. These forecasts could change when April's CPI data is published.

"Inflation pressures are still substantial and the momentum that built up over the last few years is still rolling along," said Bill Adams, chief economist at Comerica Bank.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)