Wholesale prices surged in February, further contributing to inflationary pressures

The Producer Price Index, a measure of wholesale prices, rose more than forecasters had expected in February, adding to concerns about stubborn inflation. The unexpected jump in wholesale prices raises the chances that the Federal Reserve could push back the timing of a cut to its benchmark interest rate. The Fed is widely expected to cut the fed funds rate in June, with the odds of a May cut diminishing as more inflation data comes in. Because the increase in the PPI came mainly from volatile energy prices, not a broader inflation trend, the unexpected jump seems unlikely to derail expectations for a rate cut at some point this year.

As more inflation data becomes available, it is increasingly unlikely that the Federal Reserve will reduce its interest rate before summer. The Bureau of Labor Statistics reported on Thursday that the producer price index, which tracks wholesale prices, surged by 0.6% in February compared to January, doubling the 0.3% increase anticipated by economists surveyed by Dow Jones Newswires and The Wall Street Journal.

The latest report reinforces recent indications that elevated inflation is proving more persistent than initially anticipated by forecasters. Consequently, market speculation suggesting a potential Fed interest rate cut in May was dampened by the release of this report.

According to the CME Group’s FedWatch tool, market expectations for a May rate cut plummeted to 6.9% following the report, down from 11.4% the day before and significantly lower than the 38.2% probability estimated a month ago. Meanwhile, the likelihood of a rate cut in June decreased slightly to about 63%.

Despite the Fed's goal of achieving 2% inflation, recent data suggests ongoing challenges in meeting this target. Ian Shepherdson, chief economist at Pantheon Macroeconomics, noted that the disappointing PPI report led them to revise their forecast, now expecting a rate cut in June instead of May.

However, economists remain optimistic about the future trajectory of inflation, pointing out that much of the recent increases in producer prices were driven by volatile food and energy costs, which tend to fluctuate independently of broader inflation trends. Excluding these volatile components, "core" producer prices rose by a modest 0.3% over the month.

Gus Faucher, chief economist at PNC, emphasized that while inflationary pressures persist, the gradual normalization of supply and demand post-pandemic is expected to mitigate these pressures. He anticipates that the Fed will commence rate cuts sometime in the second quarter as inflationary trends gradually subside.