Producer prices were 0.3% higher in February following a 0.6% increase in January. This was above the expected increase of 0.1%. Prices also increased on an annual basis, and are now 2.2% from 1.7%. The core rate was 0.3% higher after a 0.4% reading in the previous month and above expectations for a 0.2% increase. The strength was the result of increases in both service prices (63.5% weighting in the index), which rose by 0.4%, and goods prices (34.7% weighting), which rose by 0.3%.
Nearly 70% of the 0.3% increase final demand goods prices can be traced to the 1.6% rise in final demand for electric power; whereas, 70% of the rise in services prices was related to the increase in prices for final demand services less trade, transportation, and warehousing, which rose 0.5%. Food prices have continued to fall on an annual basis since the start to 2015, with no relief in sight. With regard to pipeline inflation, intermediate processed goods excluding food and energy were 0.5% higher, while unprocessed core goods prices were 1.4% higher. The 12-month changes in the core processed intermediate goods and unprocessed goods were 2.9% and 18.7%, respectively—finally showing much more positive pricing pressure.
Wholesale prices have been showing some signs of life in the last three months, following continued goods prices deflation for the last 2-3 years. While much of this is due to the recovery/stabilisation in energy prices, we are starting to see some broadening out into other areas. The sharp decline in energy prices through March, however, will feature in next month’s release and will be a significant deceleration in the headline rate. Nevertheless, producer prices are firming globally, including in Germany where wholesale prices are now 2.4% higher and China where they are 7.8% higher. While we continue to view this recovery in inflation as slow and moderate, we think it fair to say that prices bottomed in 2016 and inflationary pressures are indeed rising. How much faster they rise will depend on a number of factors, including the ability of China to hold it together that much longer in the face of very high debt levels and unstable growth, the ability of the global economy to continue to withstand further dollar strength, the degree of tightness in the U.S. labour market, and the amount of stimulus in the pipeline following the Trump election. As for the Fed, the data will be taken into account at its two-day meeting starting today, and the agency will take close note of the 12.4% fall in the price of oil since its recent peak in February. This decline, however, will not be enough to dissuade the Fed from raising rates at this meeting or altering its forward guidance for the moment.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.