Services, food boost U.S. producer prices in March

WASHINGTON (Reuters) – U.S. producer prices increased more than expected in March, boosted by rising healthcare and food costs, pointing to a steady buildup of inflation pressures.

FILE PHOTO: Workers box jars of pasta sauce at a plant run by Chelten House Products in Bridgeport, New Jersey July 27, 2015. REUTERS/Jonathan Spicer

Most economists believe that strengthening inflation will prompt the Federal Reserve to raise interest rates three more times this year. The U.S. central bank increased borrowing costs last month and forecast at least two more rate hikes in 2018.

Producer prices have risen solidly since January, largely driven by the services components. Economists expect these increases to spillover into the consumer price index (CPI) and the Fed’s preferred inflation measure, the personal consumption expenditures (PCE) price index.

“This pipeline price pressure will feed into consumer prices soon and will ultimately prompt the Fed to hike interest rates an additional three times this year,” said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

The Labor Department said on Tuesday its producer price index for final demand rose 0.3 percent last month after increasing 0.2 percent in February.

That lifted the year-on-year increase in the PPI to 3.0 percent from 2.8 percent in February. Economists polled by Reuters had forecast that the PPI would climb 0.1 percent last month and 2.9 percent from a year ago.

A key gauge of underlying producer price pressures that excludes food, energy and trade services rose 0.4 percent last month, advancing by the same margin for a third straight month.

The so-called core PPI increased 2.9 percent in the 12 months through March, the biggest increase since August 2014, after climbing 2.7 percent in February.

The dollar pared losses against a basket of currencies after the data while prices for U.S. Treasuries fell. Stocks on Wall Street were trading higher.


The broad-based increase in wholesale prices supports views that inflation will pick up this year.

Economists expect that a tightening labor market, weak dollar and fiscal stimulus in the form of a $1.5 trillion tax cut package and increased government spending will push inflation toward the Fed 2 percent target this year.

FILE PHOTO: A wing spar assembly robot is pictured during a launch event for the Boeing 777X at the Boeing production facility in Everett, Washington, U.S. October 23, 2017. REUTERS/Jason Redmond/File Photo

The Fed’s preferred inflation measure, the PCE price index excluding food and energy, increased 1.6 percent in February after being stuck at 1.5 percent for four straight months. The Labor Department will publish March CPI data on Wednesday.

Last month, the price of services increased 0.3 percent, rising by the same margin for a third consecutive month. Services accounted for 70 percent of the increase in the PPI last month.

They were boosted by a 0.4 percent rise in the cost of outpatient care. Overall, the cost of healthcare services rose 0.3 percent in March. Those costs feed into the core PCE price index. There were also increases in the cost of airline tickets, and cable and satellite subscriber services.

But the cost of wholesale apparel, footwear and wireless communications services fell last month.

Prices for goods rose 0.3 percent, after slipping 0.1 percent in February. They were lifted by a 2.2 percent jump in wholesale food prices. That was the biggest increase since April 2014 and followed three straight monthly declines.

Wholesale food prices last month were driven by a surge in the cost of unprocessed fish, chicken eggs and fresh and dry vegetables. Gasoline prices dropped 3.7 percent after falling 1.6 percent in February.

“Some of these price pressures likely reflect stronger global growth in the first quarter and US dollar weakness in the past 16 months,” said Chris Low, chief economist at FTN Financial in New York. “The PPI is much more sensitive to both capacity constraints and the dollar than the CPI. Nevertheless, there is no denying the rising trend in wholesale costs.”

In a separate report on Tuesday, the Commerce Department said wholesale inventories increased a bit less than initially estimated in February, but still suggested that inventory investment would contribute to economic growth in the first quarter after being a drag on output in the prior period.

Wholesale inventories rose 1.0 percent instead of the 1.1 percent jump it reported last month. That was the biggest increase since October 2013. Stocks at wholesalers increased 0.9 percent in January.

The component of wholesale inventories that goes into the calculation of gross domestic product – wholesale stocks excluding autos – surged 1.1 percent in February.

Inventory investment subtracted 0.53 percentage point from fourth-quarter GDP growth. The economy grew at a 2.9 percent annualized pace in the October-November period. Growth estimates for the first-quarter are running below a 2 percent pace.

Reporting by Lucia Mutikani; Editing by Andrea Ricci and Bernadette Baum

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