Bad news on the inflation front this morning. The producer price index for February was running super hot.
Last month--before the Iran war began, and oil prices skyrocketed--the PPI rose 0.7%. That's just the monthly increase! And it's on top of a 0.5% gain in January. The first two months, in other words, have us on track for 7% inflation at the wholesale level this year. Yikes.
Part of that was soaring food prices, which some blame on the immigration worker shortage. But even excluding food and energy, the "core" number was hotter, up 0.8% from the prior month. Everything from services to trucking to warehousing posted gains.
Businesses dealing with these price hikes now face a challenge. Try to pass them along to customers, or eat them in the form of lower profit margins? "The problem is that PPI is signaling that this is not a one-off wave of costs," wrote Santander economist Stephen Stanley. "Instead, the pipeline pressures continues to build."
And this comes right as the Federal Reserve is concluding its two-day policy meeting where it will decide what to do with interest rates. They have been gradually lowering rates for the past eighteen months, even as their preferred "PCE" inflation gauge has risen from 2.3% in late 2024, to a recent high of 2.9% in December. (The core PCE last month hit 3.1%!)
Fed Chair Powell has explained this by reasoning that the inflation increase has happened because of tariffs, and that lowering rates will help the labor market, which shed 92,000 jobs last month. But weekly jobless claims remain steady, suggesting the labor market is not worsening, and the recent string of higher inflation readings are growing harder to ignore.
"Markets expect no change in rates today, but we would not fall off our chair if [they] do hike rates by 25 basis points," wrote Carl Weinberg of High Frequency Economics. This is still an extremely out-of-consensus view, but even Claudia Sahm expects Powell "to sound more hawkish."
The real problem, if I had to articulate it, would be that we keep running into "one-off" inflation problems. Even Fed Governor Chris Waller, when asked about the spike in gasoline prices after the Iran war began, said a few weeks ago that "In the 1970s, the oil shocks kept coming and coming. This is more like a one-off event."
That may be true for gasoline. But in the larger sense, these inflation reports even before the Iran war broke out are starting to feel less like a "one-off," and more like the continuation of a stubborn inflation problem.
See you at 1 p.m!
Kelly