US producer inflation hotter in February; further rise expected amid Iran war

By Lucia Mutikani

WASHINGTON, March 18 (Reuters) – U.S. producer prices increased by the most in seven months in February, driven by higher costs for services and a range of goods, and could accelerate further as the war in the Middle East boosts oil prices and the tariff pass-through persists.

The stronger-than-expected Producer Price Index report from the Labor Department on Wednesday also suggested key inflation measures tracked by the Federal Reserve for monetary policy posted solid gains in February. The U.S. central bank is expected to hold interest rates steady at the end of a two-day policy meeting later on Wednesday. 

Fed officials will ⁠submit new economic projections, which economists expect to show upgrades to inflation estimates. The U.S.-Israeli war with Iran, which started at the end of February, has sent oil prices surging more than 40%. Economists expected the war’s inflationary impact to show up in the March consumer and producer price reports next month. Financial markets are expecting only one rate cut this year.   

“The upshot is there is nothing in the price data that suggests the Fed would be in a position to cut again soon even if oil prices suddenly dropped back,” said Thomas Ryan, North America economist at Capital Economics.

The Producer Price Index for final demand surged 0.7% last month, the most since last July, after an unrevised 0.5% increase in January, the Labor Department’s Bureau of Labor Statistics said. Economists polled by Reuters had forecast the PPI gaining 0.3%. In the 12 months through February, the PPI increased 3.4%. That was the largest gain in a year and followed a 2.9% advance in January. 

A 0.5% rise in services accounted for more than half of the increase in the monthly PPI. Services advanced 0.8% in January. Services, which have now posted three straight months of strong gains, were lifted by a 5.7% jump in wholesale prices of hotel and motel rooms. 

Trade services, which measure changes in margins received by wholesalers and retailers, rose 0.4%. That indicated businesses were not absorbing all of President Donald Trump’s sweeping tariffs, though margins for apparel, footwear and accessories retailing fell 4.5%. The cost of transportation and warehousing services increased 0.5%.

The Consumer Price Index report has shown a more moderate pace of price increases from tariffs. Some economists said the strong PPI reading suggested that tariffs would not have a short-term impact on inflation. 

Though the U.S. Supreme Court struck down the import duties, Trump responded by imposing a 10% global tariff, which he said would rise to 15%. Trade investigations into excess industrial capacity in 16 major trade ​partners and forced labor have also been launched. 

“All of this suggests that the Fed’s inflation worries extend beyond weathering a fleeting wave of one-off price hikes associated with tariffs and, more recently, an energy price spike,” said Stephen Stanley, chief U.S. economist at Santander U.S. Capital Markets. 

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

PRODUCER PRICES INCREASED ACROSS THE BOARD

There were increases in the prices for food and alcohol wholesaling, securities brokerage, dealing, investment advice and related services as well as fuels and lubricants retailing, and long-distance trucking.

The cost of hospital inpatient care rebounded 0.6%, but prices for physician care were unchanged. 

Wholesale airline fares dropped 0.6%. Some of these services components, including securities brokerage, airline fares, hotel and motel rooms go into the calculation of the Personal Consumption Expenditures price indexes, the metrics tracked by the Fed for its 2% inflation target. 

After the PPI data, economists estimated PCE inflation increased 0.4% in February after rising 0.3% in January. Estimates for PCE inflation excluding the volatile food and energy components converged around a 0.4% gain, though some economists slightly lowered their prior forecasts. 

That would mark the third straight month that the so-called core PCE price index would have risen by 0.4%, more than double the monthly pace of increase that economists say is needed on a sustained basis to bring inflation back to its target.

Core PCE inflation was estimated to have increased 3.0% year-on-year in February after advancing 3.1% in January. The Bureau of Economic Analysis will publish the delayed February PCE inflation report on April 9.

Producer goods prices soared 1.1% in February, the largest increase since August 2023, after falling for two consecutive months. A 2.4% rise in food prices amid a 48.9% jump in the cost of fresh and dry vegetables accounted for the rise in goods prices. Egg prices rebounded 93.6%.

Wholesale energy prices bounced back 2.3%, with the cost of gasoline rising 1.8%, natural gas liquids increasing 6.6% and diesel fuel surging 13.9%. In addition to raising energy prices, economists expected the Middle East conflict to boost food costs through fertilizer shortages. 

Core goods prices increased 0.3%, with the cost of electronic components and accessories surging 10.3%, likely reflecting an artificial intelligence spending boom.

“Sticky core PCE inflation will reinforce concerns for a portion of the FOMC (Federal Open Market Committee) that rates should remain on hold for some time,” said Abiel Reinhart, an economist at JPMorgan. 

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