The US producer price index (PPI) — a critical measure of US costs for US producers of goods, services and construction — jumped 0.6% in February, bringing the annual gain to 1.6%, the largest since September.
This jump, notably higher than expected, was propelled by a 4.4% rise in energy prices, exacerbating goods inflation.
The disappointing figures, which indicate a persistent rise in inflation, led to a sharp downturn in bond markets. Yields on benchmark US 10-year bonds peaked at 4.3% this month and saw a 20 basis point increase over the last week, underscoring growing investor concerns over a potential delay in interest rate cuts.
This jump in PPI, notably higher than expected, was propelled by a 4.4% rise in energy prices, exacerbating goods inflation. The data follows on from February’s consumer price index (CPI) report, which indicated a 0.4% increase, outpacing January's 0.3% rise, for a year-on-year increase of 3.2%.
These inflation reports have cast doubts on the continuing progress in controlling inflation, inciting fears among investors that the Federal Reserve may adjust its forecast, potentially eschewing the anticipated three interest rate cuts this year. Some analysts now speculate that the Fed might maintain its current rate stance throughout 2024.
Federal Reserve Chairman Jerome Powell said that before rate cuts can be considered, there needs to be certainty in inflation's return to the 2% target.
“We don’t want to have a situation where it turns out that the six months of good inflation data we had last year didn’t turn out to be an accurate signal of where underlying inflation is”, he said last week.
A change is needed
However, factors driving price increases such as corporate practices and consumer behaviour are hard to change.
President Joe Biden recently criticised major US corporations for their “exorbitant prices” charged to lift profits by price gouging. Corporate profit margins have remained high, a result of improved refinancing conditions from the low interest rate environment during the pandemic.
Other inflation drivers impacting consumers are hidden fees and "shrinkflation.” These, combined with a tendency among businesses to quickly pass on cost increases but delay price reductions, point to a behavioural component to the stubborn nature of inflation.
However, given the low unemployment rate and relatively good shape of household finances, it seems consumers have accepted paying higher prices.