U.S. producer inflation rose less than expected in March despite higher energy prices, while markets rallied; however, persistent inflation and geopolitical tensions keep uncertainty over future Federal Reserve policy decisions elevated.
U.S. producer prices grew less than expected in March even as the U.S.-Iran conflict pushed up energy product prices, according to a Bureau of Labor Statistics (BLS) report published Tuesday. Following the report, the U.S. stock index futures sustained their gains and bond prices rose even as yields pulled back.
The report relayed the same message as that of its consumer prices counterpart, which showed an accelerated pace of increases in monthly and annual retail price inflation.
Crunching the Numbers: The producer prices index (PPI) rose 0.5% month-over-month (MoM) in March, unchanged pace from the previous month. February's monthly PPI inflation was initially reported as 0.7%. Economists had braced for a 1.1% monthly increase in PPI inflation.
On a year-over-year basis, PPI climbed 4%, faster than the 3.4% pace in February, but below the consensus estimate of 4.6%. The March annual PPI inflation was the fastest since February 2023.
Core producer prices that exclude food and energy rose at a more modest 0.2% MoM pace. Energy prices jumped 8.5%, while food prices edged down 0.3%.
PPI for goods climbed 1.6%, the largest increase since August 2023 due primarily to a 15.7% jump in gasoline prices. Services prices remained unchanged following a 0.3% increase in February.
Good, Services Price Inflation
Source: BLS
Read-across for Rates: As the Iran war led to a sharp spike in oil as well as other energy and allied product prices, inflation, which has sustainably remained above the Federal Reserve’s 2% target, is likely to accelerate further.
The minutes of the March Federal Open Market Committee (FOMC) meeting released last week showed that many participants viewed that inflation would remain elevated for longer than expected amid a persistent increase in oil prices.
At the same time, most participants thought it was too early to assess the impact of the conflict on the U.S. economy, and therefore deemed it fit to “continue to monitor the situation and assess the implications for the appropriate stance of monetary policy.”
Germany reported earlier on Tuesday a sharp spike in wholesale prices, blaming higher miner oil prices and non-ferrous product prices for the spurt.
That said, some respite should come from the slowdown anticipated amid the uncertain geopolitical environment. The International Energy Agency (IEA) cut its global energy demand forecast for the year to suggest a YoY decline in demand.
The FOMC is scheduled to meet for a two-day monetary policy meeting on April 28-29, and futures traders put the odds of a rate pause at 99.5%.
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