US producer prices surprise with largest increase in four years

By Lucia Mutikani

WASHINGTON, May 13 (Reuters) – U.S. producer prices posted their biggest increase in four years in April, boosted by soaring costs for goods and services, the latest sign of accelerating inflation amid the war with Iran.

The stronger-than-expected rise in the Producer Price Index reported by the Labor Department on Wednesday presented President Donald Trump with a political headache at home as he arrived in Beijing for meetings with China’s leader.

It followed on the heels of news on Tuesday of another solid increase in consumer prices, which resulted in the annual inflation rate advancing at its fastest pace in three years.

Rising inflation, stoked by the U.S.-Israeli war with Iran, is exerting financial pressure on households. Trump, on his way to China on Tuesday, said “I don’t think about Americans’ financial situation” in making decisions as he seeks to negotiate an end to the war, adding ​that preventing Tehran from acquiring a nuclear weapon is his top priority. Trump downplayed Beijing’s potential role in ending the conflict.

The increase in inflation is becoming pervasive, posing a challenge for the Federal Reserve. Kevin Warsh is set to take over from Chair Jerome Powell when his term ends on Friday.

Economists expect the U.S. central bank to keep its benchmark overnight interest rate in the 3.50%-3.75% range into 2027.

“The jump in input prices portends further increases for consumer prices in May,” said Ben Ayers, senior economist at Nationwide. “We expect the hawkish wing of the FOMC to advocate for an extended pause in interest rates even with incoming Fed Chair Kevin Warsh likely to prefer to lower rates over time.”

The PPI for final demand surged 1.4% last month, the largest rise since March 2022, after an upwardly revised 0.7% advance in March, the Labor Department’s Bureau of Labor Statistics said. Economists polled by Reuters had forecast the PPI gaining 0.5% after a previously reported 0.5% increase in March.

Producer prices have increased strongly this year, partly driven by higher energy costs, as the war disrupted shipping in the Strait of Hormuz. The conflict is straining global supply chains, causing shortages of a wide range of goods, including fertilizers, aluminum and consumer products.

In the 12 months through April, the PPI jumped 6.0%. That was the largest increase since December 2022 and followed a 4.3% rise in March. Part of the surge in the year-on-year PPI rate reflected last year’s low readings dropping out of the calculation. The Fed tracks the Personal Consumption Expenditures price indexes for its 2% inflation target.

Economists said the surge in year-on-year PPI was consistent with PCE inflation readings in excess of 4% over time.

Stocks on Wall Street were trading lower. The dollar gained versus a basket of currencies. U.S. Treasury yields rose.

BROAD INCREASE IN PRICES

A 1.2% increase in services, the most in four years, accounted for nearly 60% of the jump in the monthly PPI. Services gained 0.2% in March and were up 5.5% in the 12 months through April. Services were driven by a 2.7% surge in margins received by wholesalers and retailers, indicating that businesses were passing on rising energy costs.

Margins for machinery and equipment wholesaling shot up 3.5%. Margins for professional and commercial equipment wholesaling increased 3.6%. Computer hardware, software and supplies retailing margins rose slightly, but were up 10.1% from a year ago amid an artificial intelligence spending boom.

Apparel, jewelry, footwear and accessories retailing margins also rose as did those for health, beauty and optical goods retailing, signs that businesses were still passing on import tariffs to consumers. Margins for fuels and lubricants retailing surged 26.6%. The cost of transporting freight by road increased. Prices for legal services rose as did wholesale airfares, though the pace slowed from March.

“These numbers show ample evidence of both tariff-related passthrough and the energy price shock rippling widely through the economy, suggesting that consumer price inflation may get significantly firmer in the months to come,” said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets.

But portfolio management fees fell. Prices for hotel and motel rooms also dropped. Healthcare costs rose marginally. These are some of the measures that go into the calculation of PCE inflation.

Wholesale goods prices increased 2.0% after rising 1.9% in March. A 7.8% surge in energy prices accounted for more than three-quarters of the broad-based rise in goods prices. Gasoline prices increased 15.6%, adding to the 19.2% advance in March.

Food prices rebounded 0.2%, with fresh and dry vegetables increasing 13.5%. Excluding the volatile food and energy components, producer goods prices shot up 0.7% after rising 0.3% for two straight months. Core goods prices increased 4.6% year-on-year amid solid gains in industrial chemicals, iron and steel scrap, and household furniture.

With the PPI and CPI data in hand, economists estimated core PCE inflation could rise by as much as 0.4% in April after gaining 0.3% in March. Estimates for the year-on-year increase in the so-called core PCE inflation were as high as 3.4%. It increased 3.2% in March.

“The energy prices are bleeding through into other prices,” said John Ryding, chief economic advisor at Brean Capital. “The conversation about policy at Warsh’s first meeting is going to be a heated one with many participants arguing that a rate hike should be a possible policy action later in the year.”

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(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)