WASHINGTON (Reuters) – US producer prices rose more than expected in March, resulting in the largest annual increase in 9-1 / 2 years and likely the start of higher inflation as the economy recovers amid an improved public health climate and massive government support.
The Labor Department report on Friday also showed a solid rise in underlying producer prices last month. That was in line with business surveys showing rising cost pressures as increasing domestic demand constrains supply.
Federal Reserve Chairman Jerome Powell reiterated on Thursday that he believed the expected rise in inflation will be transient and supply chains will adapt and become more efficient. Most economists agree, citing the considerable slack in the labor market.
“Beyond temporary effects, inflation is unlikely to continue to accelerate given the wide slack in the labor market,” said Rubeela Farooqi, US chief economist at High Frequency Economics in White Plains, New York.
The producer price index for final demand rose 1.0% last month as costs increased across the board. The PPI rose by 0.5% in February. In the 12 months to March, the PPI increased by 4.2%. That was the largest year-on-year increase since September 2011 and followed a 2.8% increase in February.
The annual PPI received a boost as the weak values of last spring were excluded from the calculation. Prices plummeted early during the pandemic amid mandatory nonessential business closures in many states to slow the first wave of COVID-19 cases.
Economists polled by Reuters had predicted that the PPI would rise 0.5% in March and rise 3.8% year-on-year. The PPI report was delayed after the Bureau of Labor Statistics website crashed. The BLS, the Labor Department’s statistics office, said it was investigating the problem with the website.
Commodity prices rose 1.7%, accounting for nearly 60% of the PPI increase last month. That was the largest increase since December 2009 and followed a 1.4% increase in February. Prices for services shot up 0.7% after rising 0.1% in February.
Stocks on Wall Street traded higher. The dollar gained against a basket of currencies. US Treasury bond prices were predominantly lower.
SOLID PROFITS
The government has provided nearly $ 6 trillion in relief since the pandemic in the United States began in March 2020, while the Fed lowered its benchmark overnight rate cut to near zero and is pumping money into the economy through monthly bond purchases.
Powell said Thursday that while he expected a surge in demand and supply chain bottlenecks as the economy reopens, it seems unlikely that the underlying inflation psychology that has been deeply ingrained over many years will change.
Employment remains about 8.4 million jobs below its February 2020 peak. Although job vacancies have risen back above their pre-pandemic levels, competition for jobs remains fierce, limiting workers’ ability to bargain for higher wages.
But some economists don’t share Powell’s inflation assessment, arguing that companies have the capacity to pass the higher cost of production on to consumers. Business surveys have shown that customer inventories are at record lows and order books are full.
“The implication is that manufacturers may have the kind of pricing power we haven’t seen in years,” said James Knightley, chief international economist at ING in New York. “With more opportunities to pass these price increases to customers, the obvious implication is that risks are increasingly moving towards higher CPI values.”
Fed Vice President Richard Clarida said on Friday that if the projected rise in inflation does not turn around in 2022, the US central bank should “take that into account.”
According to a Reuters survey, the consumer price index is likely to have risen 0.5% in March, pushing the year-over-year increase from 1.7% in February to 2.5%. The report will be released on Tuesday.
Wholesale energy prices rose 5.9%, accounting for 60% of the broad commodity price increase in March. Energy prices rose by 6.0% in February. Food prices rose by 0.5% last month.
Excluding the volatile components of food, energy and trading services, producer prices increased by 0.6%. The so-called core PPI gained 0.2% in February. In the 12 months to March, the core PPI accelerated by 3.1%, the largest increase since September 2018, after a 2.2% increase in February.
In March, wholesale prices for core goods skyrocketed 0.9%, after rising 0.3% in February. The Fed is tracking the core price index for personal consumption expenditure (PCE) for its inflation target of 2.0%, a flexible average.
PCE’s core price index is 1.5%. Some of the PPI components, which are included in the PCE core price index, rose moderately last month.
Airline tickets were up 1.1% after an increase of 3.7% in February. Healthcare costs increased by 0.2% after a decrease of 0.1% in the previous month. Portfolio management fees were up 1.6% after falling 1.1% in February.
Reporting by Lucia Mutikani; Edited by Chizu Nomiyama, Andrea Ricci and Paul Simao