The Economy

U.S. Producer Prices Surge 0.6% in January

The gain in the producer price index was the largest in more than four years but the spillover to consumer inflation may be limited.
Matthew HellerFebruary 15, 2017
U.S. Producer Prices Surge 0.6% in January

Prices paid by U.S. businesses for goods and services posted their largest gain in more than four years last month but the strength of the dollar may limit any spillover to consumer inflation.

The Labor Department said its producer price index jumped 0.6% on a seasonally adjusted basis in January. It was the largest increase since September 2012 and exceeded economists’ expectations of a 0.3% gain.

Wholesale prices of goods increased 1% in January, the most since May 2015, with half of the gain being due to a 12.9% surge in gasoline prices. Costs of pharmaceuticals, scrap steel, heating oil, natural gas and pork also moved higher.

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Despite the month-to-month surge, however, the PPI only increased 1.6% in the 12 months through January after a similar gain in December. A measure of underlying producer price pressures that excludes food, energy and trade services advanced 0.2% after edging up 0.1% in December.

“Given that most of the upward price pressure is the result of raw materials prices returning from the depths of last year, the longer-term view continues to be wary but not alarmed,” Jay Morelock, an economist at FTN Financial in New York, told Reuters.

The Institute for Supply Management’s prices index, which is closely correlated to the PPI, surged in January to its highest level since May 2011, largely reflecting increases in the prices of commodities such as crude oil.

Broader inflation has also been moving upward, nearing the Federal Reserve’s 2% target. But according to Investor’s Business Daily, “While rising demand and higher commodity costs are reviving price pressures in the production pipeline, renewed strength in the dollar may pose a headwind.”

“With the dollar strengthening further against the currencies of the United States’ main trading partners and wage growth still moderate, the spillover to consumer inflation from rising commodity prices is likely to be limited,” Reuters predicted.