By Lucia Mutikani
WASHINGTON, March 18 (Reuters) – U.S. producer prices increased by the most in seven months in February, driven by higher costs for services and a range of goods, and could accelerate further as the war in the Middle East boosts oil prices and the tariff pass-through persists.
The stronger-than-expected Producer Price Index report from the Labor Department on Wednesday also suggested that a key inflation measure tracked by the Federal Reserve for monetary policy posted a third straight month of solid gains in February.
The U.S.-Israeli war with Iran, which started at the end of February, has sent oil prices surging more than 40%. Economists expected the war’s inflationary impact to show up in the March consumer and producer price reports next month.
The U.S. central bank is expected to hold interest rates steady at the end of a two-day policy meeting later on Wednesday. Fed officials will submit new economic projections, which economists expect to show upgrades to inflation estimates. Financial markets are expecting only one rate cut this year.
“The upshot is there is nothing in the price data that suggests the Fed would be in a position to cut again soon even if oil prices suddenly dropped back,” said Thomas Ryan, North America economist at Capital Economics.
The Producer Price Index for final demand surged 0.7% last month, the most since last July, after an unrevised 0.5% increase in January, the Labor Department’s Bureau of Labor Statistics said. Economists polled by Reuters had forecast the PPI gaining 0.3%. In the 12 months through February, the PPI increased 3.4%. That was the largest gain in a year and followed a 2.9% advance in January.
A 0.5% rise in services accounted for more than half of the increase in the monthly PPI. Services advanced 0.8% in January. Services, which have now posted three straight months of strong gains, were lifted by a 5.7% jump in wholesale prices of hotel and motel rooms.
Trade services, which measure changes in margins received by wholesalers and retailers, rose 0.4%. That indicated that businesses were not absorbing all of President Donald Trump’s sweeping tariffs, though margins for apparel, footwear and accessories retailing fell 4.5%. The cost of transportation and warehousing services increased 0.5%.
PRODUCER PRICES INCREASED ACROSS THE BOARD
There were increases in the prices for food and alcohol wholesaling, securities brokerage, dealing, investment advice and related services as well as fuels and lubricants retailing, and long-distance trucking. The cost of hospital inpatient care rebounded 0.6%, but prices for physician care were unchanged. Wholesale airline fares dropped 0.6%.
Some of these services components, including securities brokerage, hospital inpatient care, hotel and motel rooms go into the calculation of the Personal Consumption Expenditures price index, excluding the volatile food and energy components.
The so-called core PCE price index is one of the metrics tracked by the Fed for its 2% inflation target. After the PPI data, economists maintained their estimates that core PCE inflation increased 0.4% in February. That would mark the third straight month that the core PCE price index would have risen by 0.4%, more than double the monthly pace of increase that economists say is needed on a sustained basis to bring inflation back to its target.
Core PCE inflation was estimated to have increased 3.1% year-on-year in February, which would match January’s rise. The Bureau of Economic Analysis will publish the delayed February PCE inflation report next month.
U.S. stocks opened lower. The dollar gained versus a basket of currencies. U.S. Treasury yields rose.
Producer goods prices soared 1.1% in February, the largest increase since August 2023, after falling for two consecutive months. A 2.4% rise in food prices amid a 48.9% jump in the cost of fresh and dry vegetables accounted for the rise in goods prices. Wholesale energy prices rebounded 2.3%, with the cost of gasoline rising 1.8% and natural gas liquids increasing 6.6%.
In addition to raising energy prices, economists expected the Middle East conflict to boost food costs through fertilizer shortages.
(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci )
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