Services, food boost US producer prices in March

Services, food boost US producer prices in March

Workers box jars of pasta sauce at a plant in Bridgeport, New Jersey
File photo of workers packing jars of pasta sauce at a factory in Bridgeport, New Jersey. (REUTERS/Jonathan Spicer)

WASHINGTON: US producer prices increased more than expected in March, boosted by rising healthcare and food costs, pointing to a steady buildup of inflation pressures.

Most economists believe that strengthening inflation will prompt the Federal Reserve to raise interest rates three more times this year. The US 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 US economist at Capital Economics in Toronto.

The Labour Department said on Tuesday (Apr 10) its producer price index for final demand rose 0.3 per cent last month after increasing 0.2 per cent in February.

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

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

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

The dollar pared losses against a basket of currencies after the data while prices for US 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 US$1.5 trillion tax cut package and increased government spending will push inflation toward the Federal Reserve's two per cent target this year.

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

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

They were boosted by a 0.4 per cent rise in the cost of outpatient care. Overall, the cost of healthcare services rose 0.3 per cent 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 per cent, after slipping 0.1 per cent in February. They were lifted by a 2.2 per cent 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 per cent after falling 1.6 per cent 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 per cent instead of the 1.1 per cent jump it reported last month. That was the biggest increase since October 2013. Stocks at wholesalers increased 0.9 per cent in January.

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

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

Source: Reuters