The Producer Price Index saw an increase of 0.8% for February. In comparison, it had seen an increase of more than one percent in January. The prices of goods increased by nearly two-and-a-half percent. This was the biggest gain at these prices in the past thirteen years. It was also an increase of more than a percent compared to the month before. The major share of the growth in the Producer Price Index was because of an increase of nearly fifteen percent in the cost of wholesale gasoline, which had increased by only three percent in January. The cost of food, warehousing services, and transportation increased by two percent. The cost of healthcare increased by a little. The cost of services remained stable. There was also a decline in the cost of motel, hotel rooms, footwear, jewelry, and apparel. The cost of airfares declined by more than two percent.
In a year through the previous month, the Producer Price Index increased by more than nine percent. This was aligned with the growth that happened in the first month of the year. The growth in the Producer Price Index for February was also according to experts' predictions. But the released data does not completely factor in the increase in the cost of oil and the other commodities such as wheat after the invasion of Ukraine by Russia began a couple of weeks ago. The producer prices in the country have seen good growth in the previous month because the prices of goods such as gas have increased by a significant margin. There are also more increases predicted in the future because the war between Ukraine and Russia is still ongoing. This has made commodities such as crude oil costlier.
PNC economist Kurt Rankin said, "The conflict in Ukraine is expected to hit food prices globally through the spring, as Russia and Ukraine combine to account for 14% of wheat production and 30% of global exports. This supply and demand imbalance will also continue to put upward pressure on food prices for producers and, thus, US households in the coming months. Producer prices are an early warning sign of what households can expect in terms of consumer price inflation. The message is clear that consumer prices have several months of exceptional gains ahead of them, despite the fact that the Fed is set to begin hiking its policy rate in March and continue to do so throughout the year."
The Producer Price Index Indicates The Inflation Will Remain High
The data released by the Labor Department gave more evidence that inflation will remain quite high in the near future. This is despite the price pressures caused by the costs of manufacturing increased in the previous month. The Federal Reserve is going to increase the interest rates in the coming days for the first time in several years. The inflation in the country is running higher than the target set by the Federal Reserve. Experts say there may be more than six hikes in the rates this year. The stocks on Wall Street were quite high because the cost of oil went down to nearly ninety dollars per barrel after Russia said that the Iran nuclear deal should be resumed as early as possible. The prices of crude oil increased a lot. The global benchmark Brent crude went to nearly $140 per barrel. This was the impact of the war between Ukraine and Russia. The dollar declined against a basket of currencies. The US Treasury prices were trading at a higher level.
Yardeni Research's Ed Yardeni said, "Fed officials no longer use the word 'transitory' to describe the rebound in inflation since last March. Instead, they acknowledge that it has turned out to be 'persistent.' But we don't expect aggressive moves because most Fed officials still expect (hope) that inflation will moderate once supply-chain disruptions are fixed. Putin's war ends (hopefully soon)." BMO Capital Markets' expert Ian Lyngen said, "Still ample inflation in the system and consistent with the Fed's liftoff ambitions." Chief US economist at Citigroup Andrew Hollenhorst said, "This is consistent with the idea that underlying inflation is running at or above 5%."
Producer Price Index: Business Sentiment Takes A Hit
The increasing cost of oil and the war between Ukraine and Russia had a negative impact on the business sentiment in the state of New York. The New York Federal Reserve said that the general business conditions index declined by fifteen points to a mark of negative twelve. This was the lowest reading of the sentiment in the past two years. Any level that is negative shows that there has been a narrowing of the factory activity. Manufacturers said that there had been a contraction in new shipments and orders. But they have continued to shell out higher prices for their inputs as well as charge extra for the finished products. Despite the eventual decline of the raging prices of oil, inflation will remain quite high because there has been a comeback of coronavirus infections in China.
The country is a big source of raw materials for factories. This puts a lot of pressure on the already stressed supply chains. The problems are compounded because of the already high inflation. Experts say that despite the moderation in the data, the Producer Price Index still represents the high levels of inflation present in the system. The data has come amidst the start of a gathering by the Federal Reserve. The Federal Open Market Committee is the monetary policy-setting branch of the central bank. It will likely increase the interest rates for the first time in the past four years. In his testimony to Congress earlier this month, the present chairman Jay Powell said that the initial hike in the interest rates would be a twenty-five-basis point increase rather than fifty basis points. This has not happened in the past two decades.
But experts have said that it was the right measure to take because the consumer prices in the nation are increasing at the highest speed in nearly half a century. The Federal Reserve chairman has left the option of the central bank increasing the interest rates by a bigger increment for the latter part of this year if the inflationary pressures do not subside after the initial increases. Experts say that the present international conflict will further cause an increase in the already high inflation. This is because there has been a sudden increase in energy prices after the conflict began and the country and its allies rolled out a large number of sanctions against the warring nation.
Senior economist at FHN Financial Will Compernolle said, "We expect March PPI to show larger increases as commodity prices increase and global trade disruptions amplify. For consumer prices to slow, firms will first have to grapple with disruptions from the Russian invasion and new lockdowns in the heart of China's most productive regions." Economist at Moody's Analytics Adam Kamins said, "Geopolitical uncertainty likely bears much blame. Many firms are sitting tight, either because their customers are doing so or to gauge the invasion's economic ramifications." Jefferies economist Aneta Markowska said, "Inflation expectations have moved higher, even on longer-term horizons. Powell can't afford to take his eyes off inflation."
The Producer Price Index numbers for February would be proof for some experts who claim that the Federal Reserve chairman Jerome Powell has let the reins slip out of his hands. But the central bank is going to attempt to fix that. But if it takes small steps to get there, it might not be able to make huge changes. That might be the reason that the chairman told Congress that he would back an increase in the interest rates by at least twenty-five basis points. The levels of the Producer Price Index for February can come as a disappointment for some. But the levels have already been so high that they will not have much change in the thinking of the Federal Reserve.