Rising wholesale prices support interest rate hike

By Yemeng Yang

U.S. wholesale prices increased in February due to rising energy and service prices, clearing any doubt that the Federal Reserve will raise rates at this week’s meeting.

The Producer Price Index, or PPI, for final demand–goods sold as personal consumption, capital investment, government purchases, and exports–increased a seasonally adjusted 0.3 percent after jumping 0.6 percent in January, the U.S. Bureau of Labor Statistics reported Tuesday.

This rise is higher than economists’ consensus of 0.1 percent compiled by Bloomberg.

Producer prices surged 2.2 percent for the 12 months ended February 2017 on an unadjusted basis. It’s the biggest 12-month increase since March 2012 and the first more-than-2-percent increase since early 2014.

Unlike in recent months, the price increase in February was driven not only by a rebound in oil prices, but an increase in prices for final demand service, including trade services, transportation and warehousing, which accounts for 80 percent of the advance in the PPI.

Prices for final demand goods moved up 0.3 percent in February, with a 0.6 percent gain for wholesale energy prices, and the index for final demand services rose 0.4 percent, the largest advance since June 2016.

Excluding foods, energy and trade services, producer prices still rose 0.3 percent in February. The index climbed 1.8 percent for the 12 months ended in February.

Monthly PPI index for final demand increased 0.16 percent on average in the past year. (Yemeng Yang/MEDILL)

“The PPI data reflect some early-stage price pressures, but those pressures are building only gradually,” said Richard F. Moody, chief economist at Regions Financial Corp., in an email interview. “This is consistent with how the FOMC sees the economy evolving.”

The Federal Open Market Committee is expected to announce a short-term rate increase at the conclusion of its meeting on Wednesday.

“There is nothing in today’s U.S. economic data releases to suggest that the Federal Reserve will deviate from the widely expected 25 basis point fed funds rate hike tomorrow,” wrote Robert A. Dye, chief economist at Comerica Bank, in a note.

“If there was even a smidgen of doubt the Fed will raise rates at tomorrow’s meeting, today’s report on inflation should put it to rest,” wrote Brian Wesbury, chief economist at First Trust Advisors LP.

The question is whether the FOMC will signal on Wednesday an even faster pace of rate hikes based on the inflation in recent months. The prior Summary of Economic Projections issued by the FOMC in December 2016 implied a total of three funds rate hikes in 2017.

Moody said he expects three increases this year, and no more.

“A faster implied pace of hikes would suggest they are worried about falling behind the curve on inflation, and I do not think they are at that point yet,” he said.

Photo at top: The price changes of apples sold to customers are included in the calculation of PPI. (Yemeng Yang/MEDILL)