Wholesale prices jumped last month in a sign that the Federal Reserve’s battle against inflation may not be over, likely forcing the central bank to delay interest- rate cuts.
San Francisco Fed President Mary Daly acknowledged Friday that inflation risks remain, saying that to finish bringing inflation back to the Fed’s 2% target will take “fortitude.” In remarks prepared for delivery at the NABE Economic Policy Conference, she said Fed policymakers will need to “resist the temptation to act quickly when patience is needed and be prepared to respond agilely as the economy evolves.”
Underscoring the challenge is the latest reading on the producer price index for final demand, which increased by 0.3% in January. It was the fastest pace logged in five months, according to data released Friday by the Bureau of Labor Statistics, and came in significantly higher than the 0.1% economists surveyed by FactSet had predicted. The
S&P 500
was little changed in afternoon trading on Friday.
Goods prices declined by 0.2% last month, which means services drove much of Friday’s hot print. The index for final demand services moved up 0.6% in January, the largest increase since July. Most of the increase was driven by upticks in areas such as healthcare, professional services, financial services, and entertainment. In particular, financial services and healthcare price increases were significant, as was a steep rise in hotel rates.
“One month’s data does not make a trend, but ongoing wage pressures and seemingly insatiable consumer demand on the services side of the economy at least prevent the January 2024 PPI bounce from being dismissed as an outlier out of hand,” PNC senior economist Kurt Rankin wrote Friday.
Despite the decline in the cost of goods, the recent PPI and consumer price index data are likely bad news for Fed officials, several of whom have noted they wanted to see a broadening of disinflation—particularly in the services side of the U.S. economy—before cutting interest rates. The numbers also suggest the Fed has been right in taking a more cautious, wait-and-see approach to easing monetary policy.
Daly said she is mindful of the potential for slower progress in reining in inflation in the months ahead. “There is a risk that the positive supply developments we saw last year might be hard to sustain,” she noted.
But she said Friday that none of the January data released so far surprised her. “They’re well within the bounds of what normal…volatility looks like,” Daly said. Turning points within an economy, when things start to slow to a more sustainable pace, are always bumpy, she added.
“What I’m seeing now is ongoing progress in inflation that’s going to be moving around in terms of the monthly estimates—but the progress is still there,” Daly said. Her baseline outlook is still that inflation is going to come down gradually.
One reason that the PPI data is closely monitored is that it feeds into the calculation of the Fed’s preferred inflation gauge, the personal-consumption expenditures price index. That data is due out on Feb. 29. Given the strong PPI and CPI reports, Citi’s chief U.S. economist Andrew Hollenhorst projects the gain in core PCE—which excludes the typically more volatile food and energy prices—will increase to 0.4% on a monthly basis from the 0.2% rate in December.
Bank of America economists Stephen Juneau and Michael Gapen are similarly estimating that January core PCE inflation hit 0.4%. “While January data are often noisy, the inflation data do suggest that disinflation took two steps back in January,” the economists wrote Friday.
Hollenhorst forecasts the much-watched “supercore” PCE inflation—which takes into account the price of services excluding energy and housing—hit a 0.55% pace in January. That would be the strongest reading since March 2022 and a potential warning indicator for the persistent stickiness of services inflation.
If core PCE was 0.4% last month, that would mean the six-month annualized PCE reading would be 2.4%, up from the 1.9% rate it has previously been running at—another troubling sign for Fed officials.
The recent inflation data may have disappointed, but Daly on Friday focused on the significant progress that the Fed has already made in easing price pressures. ”Price stability is within sight. But there is more work to do,” she said. ”Progress is not victory, and we, the FOMC, need to deliver more than a few fleeting moments of relief.”
As with the CPI data released earlier this week, Santander’s chief economist Stephen Stanley pointed out that the increases driving Friday’s PPI report were due, at least in part, to one-off, beginning-of-the-year price hikes.
That seemed to be the case last year as well. Core inflation had slowed dramatically in the final months of 2022 before registering a 0.4% jump in January 2023. Yet the back half of 2023 showed remarkable progress and Fed officials have been on guard for bumpy months. Fed governor Christopher Waller, for example, specifically called out the potential impact of annual revisions and start-of-the-year noise in the data.
“The good news here is that the January rate of inflation is unlikely to be sustained going forward,” Stanley wrote. “The bad news from the Fed’s perspective is that the benign core inflation trend in place late last year has been arrested, at least for the moment, and this suggests that businesses retain significant pricing power.”
With Fed officials already unconvinced that inflation was sustainably on the path toward a 2% target, the January inflation data could very well “set back the clock” on rate cut decisions by at least a couple of months,” Stanley says.
For her part, Daly said Friday the Fed is after “price stability built to last.” But that may mean central bank policymakers could be on hold for most of the year in order to achieve that mandate.
And that’s something few might be prepared for.
Write to Megan Leonhardt at [email protected]
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