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Strong services spur US producer inflation in April
By Lucia Mutikani
WASHINGTON (Reuters) – U.S. producer prices rose more than expected in April amid strong gains in the costs of services such as portfolio management and hotel accommodation, indicating that inflation remained stubbornly high at the start of the second quarter.
The Labor Department report released Tuesday also showed that wholesale product prices rose solidly last month, even as the cost of food declined. It followed recent surveys that showed a rise in inflation expectations, prompting traders to reduce bets on a September interest rate cut from the Federal Reserve.
“Producer-level inflation is back at the forefront this month and consumers will certainly feel the heat as higher production costs will fuel the inflation they see in the goods and services they buy,” said Christopher Rupkey, economist -Head of FWDBONDS. . “If Fed officials were looking for some moderation in the inflation surge in the first quarter, it will not appear at the beginning of the second quarter.”
The producer price index for final demand rose 0.5% last month after falling a downwardly revised 0.1% in March, the Labor Department’s Bureau of Labor Statistics reported.
Economists polled by Reuters had forecast the PPI would rise 0.3%, following a previously reported 0.2% rise in March. A 0.6% jump in services accounted for almost three-quarters of the increase in PPI. April’s increase was the biggest since July 2023 and followed a 0.1% drop in March. In the 12 months to April, the PPI rose 2.2%, after rising 1.8% in March.
Inflation increased in the first quarter, in a context of strong domestic demand, after having slowed down for much of last year. Economists largely attributed the increase to a combination of companies that raised prices earlier in the year and service providers like auto insurance that recouped higher costs. They are optimistic that inflation will resume its downward trend this quarter as the job market cools.
That hope was shared by Fed Chairman Jerome Powell, who said at a banking event in Amsterdam: “I expect inflation to come back down… on a monthly basis to levels that more closely resemble the lower readings we had last year.” , 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 fell against a basket of currencies. US Treasury prices rose. Financial markets recorded odds of around 60% of a rate cut in September, down from the 64% probability before the PPI data.
The story continues
Some economists believe the Fed could make its first rate cut in July. The US central bank earlier this month left its benchmark overnight interest rate unchanged at the current range of 5.25%-5.50%, where it has been since July. The Fed has raised its key rate by 525 basis points since March 2022.
FOCUS ON CPI DATA
Consumer price data released on Wednesday may offer new clues about the timing of the long-awaited rate cut.
A 0.6% increase in the prices of services less trade, transport and storage was responsible for 70% of the jump in services inflation. This primarily reflected a 3.9% increase in portfolio management fees amid a recent stock market rally, which followed a 0.6% increase in March.
The cost of hotel and motel rooms rebounded 2.4% after falling 1.4% in March. The cost of road freight transport has also increased. But wholesale airline passenger fares fell 3.8% after rising 1.7% in March. Health and medical insurance costs rose 0.2% after posting a similar gain in March.
Property and casualty insurance prices rose 0.1%. This followed a 0.4% increase in March.
Business services margins, which measure changes in margins received by wholesalers and retailers, increased 0.8%. But the cost of transport and storage services fell 0.6%.
Fees for portfolio management, medical assistance, hotel and motel accommodation, insurance and airline tickets are among the components that make up the calculation of personal consumption expenditure (PCE) price indexes. PCE price indexes are the measures of inflation monitored by the Fed for its 2% target.
“Margins remain 33% above the 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 gradually decline over the next year as cash-strapped households look to make their dollars work harder and retailers fight for market share.” They were driven by a 2.0% increase in energy product prices. Wholesale gasoline prices recovered 5.4%, but natural gas prices fell 3.2%. Food prices fell 0.7%.
Excluding food and energy, goods prices rose 0.3% after remaining unchanged in March. The narrower PPI measure, which excludes food, energy and commercial services components, rose 0.4% in April after rise 0.2% in March. Core PPI rose 3.1% from a year ago, the biggest gain since April 2023, after rising 2.8% in March.
Based on PPI data, economists estimated that the core PCE price index could rise 0.2% or 0.3% in April, after gaining 0.3% in March. This would result in a rise in underlying inflation by around 2.8% in annual terms, corresponding to the increase in March. These forecasts may change when the April CPI data are published.
“Inflationary pressures are still substantial and the momentum that has developed over the past few years is still continuing,” said Bill Adams, chief economist at Comerica Bank.
(Reporting by Lucia Mutikani; editing by Andrea Ricci)