Rising energy prices helped to fuel yet another hot inflation reading for February.
A closely watched gauge of US wholesale inflation rose at its fastest pace in months, according to new data released Thursday. While a seasonal energy price surge is at the root of the gain, and less-volatile categories are showing signs of a continued cooldown, the latest Producer Price Index is yet another reminder of the arduous process to rein in inflation.
The PPI, which measures the average change in prices that producers and manufacturers pay to suppliers, rose 1.6% for the 12 months ended in February, leaping from a 1% increase in January, according to Bureau of Labor Statistics data released Thursday. Economists had projected an annual gain of 1.1% for February.
On a monthly basis, PPI rose 0.6%. That’s double economists’ expectations for prices to rise 0.3% for the month. Energy prices soared 4.4% from January and registered the highest monthly increase since August 2023.
PPI captures average price shifts before they reach consumers and serves as a potential signal for the prices consumers ultimately end up paying.
“The February PPI report was a mixed bag,” Gus Faucher, chief economist for PNC Financial Services, wrote in a note issued Thursday. “Inflationary pressures remain in the pipeline, but with supply and demand continuing to normalize after the pandemic, inflation continues to gradually slow.”
And of all the major inflation gauges, PPI has shown the quickest return to pre-pandemic norms. In fact, despite the upswing to 1.6% in February, the current annual rate is still below the 1.7% average gain seen between 2011 and 2019, a review of BLS data shows.
The all-important ‘core’
The hot PPI report comes two days after a similar trend was seen in the February Consumer Price Index, a closely watched gauge of inflation at the retail level. The headline CPI ticked higher to a 3.2% annual increase from 3.1% and rose from January at 0.4%, its fastest pace in months.
A big driver: Gas prices, which have climbed to four-month highs because of a seasonal rise in demand and a switch to pricier fuel blends.
Gas and food prices are some of the most visible to consumers, whose wallets are greatly impacted by the trajectory of those prices. Still, these prices also can vary widely and can quickly be influenced by unexpected factors, such as a refinery shutdown, a bad storm or a sweeping animal illness.
As such, the Fed more closely looks at the behavior of price changes within “core” gauges that strip out the more volatile food and energy to provide a lens into underlying inflation.
Core PPI rose 0.3% for the month, a slowdown from the 0.5% jump in January. On an annual basis, core wholesale inflation measured 2%, in line with the yearly increase seen in January. Economists were looking for the annual core reading to moderate to 1.9%.
“For now, these increases in energy prices and food prices are not translating into the core number,” Eugenio Aleman, chief economist at Raymond James, told CNN. “For now, it’s not that bad; but if this continues, and we have more shocks in terms of prices of petroleum, then the Fed will have to be very conscious of how that is affecting core.”
‘More work to do’
Because energy and gas prices haven’t risen as much this month so far, Aleman said he expects improved readings for both the CPI and PPI in March. He also believes a Fed rate cut is still on the table for June.
But, as it stands now, this week’s PPI and CPI reports keep the Fed on alert, said Kyle Anderson, clinical assistant professor of business economics at Indiana University’s Kelley School of Business.
“This is certainly a sign that we’ve got more work to do if we’re going to get inflation closer to the Fed’s target rate [of 2%, as measured by the Personal Consumption Expenditures price index],” he told CNN in an interview. “This is definitely a signal that, on all ends, both core and otherwise, that we’re still facing challenges.”
Energy prices accounted for 70% of final demand goods increase for the months, BLS said. But when taking energy and food out of that equation, core final demand goods still was up 0.3% from January, matching the highest monthly gains seen within the past year.
Final demand services rose 0.3% from January, a slowdown from the 0.5% uptick the month before.
“The trend has been that inflation has been falling on the goods production side, and that what inflation we’ve had has been driven by the service side,” he said. “This may change a little bit of that narrative.”
