Producer price index inflation data overshot estimates, but key components offered good news for the Federal Reserve's primary inflation rate. The PPI data dilutes the importance of Wednesday's upside surprise for the consumer price index, which added to inflation concerns sparked by Trump tariffs. The S&P 500 climbed in early Thursday stock market action.
The PPI's broad measure of health care services inflation, which is the biggest component of the Fed's key core inflation rate, eased to 2.6% from 2.9%.
Economists highlighted the tricky seasonal adjustment process for inflation at the start of the year, when companies often raise prices. Their advice: Wait until February data before drawing conclusions on the inflation trend.
Still, an extended Federal Reserve pause is likely as President Donald Trump fires off a barrage of new or expanded tariffs, including those announced Monday on steel and aluminum that have lifted Nucor and Steel Dynamics. New "reciprocal tariffs" are expected to be announced today.
PPI Details
The overall PPI rose 0.4% on the month and 3.5% from a year ago, overshooting forecasts of 0.3% and 3.2%.
The core PPI rose 0.3% on the month, as expected. However, the 12-month inflation rate rose to 3.6% vs. the 3.3% Econoday consensus forecast amid some data revisions.
However, economists focus on key PPI components that feed into the Fed's preferred inflation rate, the core PCE price index.
The year-over-year decline in health services inflation came as physician prices fell 0.5%, hospital outpatient care prices 0.4% and inpatient care 0.3%.
Meanwhile, airline passenger services prices fell 0.3%.
After the PPI data, Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, "confidently" predicted that the core PCE inflation rate will fall to 2.6% from 2.8% when January data comes out on Feb. 28.
CPI Hits And Misses
The overall CPI rose 0.5% on the month, lifting the 12-month CPI inflation rate to 3% from 2.9%.
The core CPI rose 0.4%, above 0.3% forecasts. The 12-month core inflation rate unexpectedly ticked up to 3.3%, instead of easing to 3.1%.
The 0.4% core CPI increase looked even worse when not rounded to tenths of a percentage point. Rounded to thousandths, the increase was 0.446%.
On a 12-month basis, the increase to 3.3% was a bit overstated compared to the reading of 3.258%.
Goods And Services Prices Jump
The hot core CPI inflation reading came as core goods prices rose 0.3%, the highest since May 2023. Services prices also were hot, rising 0.5%.
Hotel and motel prices jumped 1.7% on the month. Owners' equivalent rent, the biggest part of the core CPI, rose 0.3%.
Transportation services prices jumped 1.8%.
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Wall Street Reaction To Hot CPI
"Inflation has gotten sticky with items like used cars and auto insurance ticking back up," wrote David Russell, global head of market strategy at TradeStation. "Investors may not react too aggressively yet because we get more data before the key dotplot in March," which will show updated rate-cut projections from Fed policymakers. "But time could be running out for this bull market if we don't see progress on inflation soon."
However, Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, had a more soothing take: "The sharp increase in the core CPI is less alarming than it first appears."
Tombs highlighted "how disruptive the seasonal adjustment procedure can be at the turn of the year and how dangerous it is to extrapolate from one month's data."
He advises waiting until February to judge the inflation trend.
Fed Chair Powell Testifies
Fed Chairman Jerome Powell is in his second day of monetary policy testimony, appearing before the House Financial Services Committee starting at 10 a.m. ET.
Powell said the underlying economy is "very strong" but hasn't yet been asked about the hotter-than-expected CPI data.
Powell reiterated that "policy restraint for longer" is likely, if the labor market remains solid yet inflation doesn't keep falling toward 2%.
Fed Rate-Cut Odds
Markets are now pricing in than 2.5% odds of a rate cut at the March 19 Fed meeting and just 14.5% odds for the May 7 meeting, according to CME Group's FedWatch tool. For the June 18 meeting, markets now see 39.5% odds of a rate cut, still down from 50% odds on Tuesday.
Odds of a rate cut at the July 30 meeting are roughly a coin-flip: 49% to 51%, which is an improvement from 42%-58% after Wednesday's CPI.
Trump Tariff Inflation Impact
As Powell has explained recently, the impact of tariffs on inflation is far from certain. It can depend on currency fluctuations, substitution of goods by consumers, and decisions by wholesalers and retailers about how much of a price increase they will pass along.
Deutsche Bank economists led by Justin Weidner wrote in a Monday note that Trump tariffs could push the Federal Reserve's main core inflation rate above 3.5% this year. That includes the impact of the steel and aluminum tariffs, the delayed tariffs on Canada and Mexico and Trump's new plan for "reciprocal" tariffs.
The latter idea is a way for Trump to try and avoid tit-for-tat retaliation. It would have the U.S. match tariffs on goods imports from countries that have tariffs on imports from the U.S. Citing World Bank data, Deutsche Bank figures reciprocal tariffs could boost the average tariff rate on imports by 3.3 percentage points. The reciprocal tariffs, depending on how much was passed to customers, could boost inflation by 0.25 to 0.4 percentage point, they estimate.
The steel and aluminum Trump tariffs might add a bit less than one-tenth of a percentage point to the inflation rate, Deutsche Bank figures, though the impact would be much higher on autos and appliances.
Meanwhile, President Trump on Wednesday morning again signaled that he wants lower interest rates.
"Interest Rates should be lowered, something which would go hand in hand with upcoming Tariffs!!! Lets Rock and Roll, America!!!" the president said early W
S&P 500
The S&P 500 rose 0.5% in Thursday morning stock market action. On Wednesday, the S&P 500 finished off 0.3%, after opening 1.1% lower on the CPI data.
The S&P 500 ended 1.1% below the Jan. 23 record closing high.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
