Yell About This: Inflation Surges Twice As Much As Expected

A key gauge of inflation surged higher in February, confirming that the pace of inflation has accelerated as the new year has got underway.

The producer price index, which measures the prices paid to U.S. businesses for their goods and services, rose by 0.6 percent in the second month of 2024, the Department of Labor said Thursday.

This was twice the rate of inflation in the producer price index, or PPI, recorded in January and twice what Wall Street was expecting.

Compared with a year ago, the index is up 1.6 percent, a significant acceleration from the 0.9 percent 12-month increase recorded in January. Economists had forecast a 1.2 percent increase.

This was the fastest monthly gain since August of last year and the highest yearly gain since September. The producer price index has risen in three out of the last four months.

Data from the consumer price index and the PPI in January and February suggests that the slowdown in inflation seen last year has stalled. This casts into doubt the timing and extent of interest rate cuts that might come from the Federal Reserve this eyar.

Stripping out food and energy prices, core PPI rose 0.3 percent for the month. That’s a step down from the 0.5 percent in Januuary but above the consensus estimate of 0.2 percent. Compared with a year ago, core PPI is up two percent, exactly the 12-month gain recorded in January.

Also excluding a category called trade services, which measures the mark up of retailers and wholesalers, prices rose 0.4 percent in February, down from the monthly gain of 0.6 percent at the start of the year. Over the past 12 months, this so-called core-core PPI measure is up 2.8 percent, up from January’s 2.6 percent.

If producer price inflation were to run as hot as it did in February for the next 12 months, prices would rise 6.9 percent.

The producer price part of the measure’s name comes from the fact that the price changes are measured from the point of view of the seller of the goods rather than the buyer. That means they do not include sales or excise taxes or government subsidies that go to consumers. Shipping costs that are paid by consumers are also excluded. The prices of imports are not included because those are not received by U.S. producers but by foreign producers.

The final demand part of the measure’s name comes from the fact what is measured is the prices of sales to what are sometimes called end-users. That is, these are not sales of components or materials that are directly employed to create goods and services sold to consumers. These are products sold to customers who are government buyers, household buyers, businesses buying capital goods, and foreign buyers.

Earlier this week, the Department of Labor’s consumer price index was reported as rising 0.4 percent in February compared with the previous month. Compared with 12-months earlier, it was up 3.2 percent. The core measure, which excludes food and energy prices, also rose 0.4 percent and was up 3.8 percent over 12-months. The monthly and annual gains in core CPI were higher than expected.

Prices for final demand goods were up 1.2 percent in February, the largest increase since August. A big jump in energy prices explains most of that rise, although the measure of core goods—which excludes food and energy—was up by 0.3 percent. Final demand food prices rose one percent.

Prices for final demand services rose 0.3 percent in February after rising 0.5 percent in January.

In addition the index of final demand goods and services, the government calculates indexes for intermediate demand products. These are goods and services purchased by businesses as inputs to production, excluding capital investments. Intermediate goods can include wood used in home construction, hardware assembled into computers, and wheat that is later processed into food.

Processed goods for intermediate production jumped 1.6 percent in February, the biggest increase since August. Foods and feeds were up 0.3 percent and fuels up 6.2 percent.

Core intermediate goods rose 0.5 percent, the third straight monthly gain and an acceleration from January’s 0.3 percent and December’s 0.1 percent. Compared with a year ago, processed goods for intermediate demand are down 1.8 percent, less than half the 3.7 12-month decline recorded in January.

The index for unprocessed goods for intermediate demand rose 1.2 percent. That was driven by a big jump in energy prices and a smaller increase in food and feeds prices. Excluding those categories, unprocessed goods prices fell.

The producer price index is often referred to as the “wholesale price index,” although this is incorrect. It is not an index of wholesale prices and does not particularly reflect prices of goods sold at wholesale rather than retail. It was known as the wholesale price index until it was changed more than 45 years ago, although that name was always inaccurate.