Goods, Services Drive U.S. Producer Prices Higher

U.S. monthly producer prices increased by the most in more than 12 years in March amid strong demand for goods and services, the latest sign of persistently high inflation that could compel the Federal Reserve to aggressively tighten monetary policy.

The report from the Labor Department on Wednesday followed on the heels of news on Tuesday that consumer prices accelerated in March as Russia's war against Ukraine boosted the cost of gasoline to record highs, leading to the largest annual increase in inflation since 1981.

The strong inflation data cemented economists' expectations that the Fed will hike rates by 50 basis points next month. The U.S. central bank is also expected to soon start trimming its asset portfolio.

Inflation was initially fanned by a massive cash infusion from the government to cushion against the devastating impact of the coronavirus pandemic. The Russia-Ukraine war has worsened the inflation outlook.

"The broad-based increases reinforce yesterday's CPI report that will keep the Fed on its aggressive tightening path in the coming months," said Will Compernolle, a senior economist at FHN Financial in New York. "Supply chain easing, especially on the goods side of production, will be an important source of disinflation for the Fed to successfully achieve its goal of price stability."

The producer price index for final demand increased 1.4%, the largest gain since the government revamped the series in December 2009, after rising 0.9% in February. Goods prices increased 2.3%, matching February's advance. A 5.7% rise in energy prices accounted for more than half of the increase in the PPI last month. Energy prices jumped 7.5% in February.

Food prices climbed 2.4%, though the cost of beef and veal fell 7.3%. There were also increases in the wholesale prices of iron and steel scrap, but the cost of cold rolled steel sheet and strip declined.

Prices for services jumped 0.9% after climbing 0.3% in February. A 1.2% rise in margins for final demand trade services, which measure changes in margins received by wholesalers and retailers, accounted for more than 40% of the rise in services.

STRONG, BROAD GAINS

The cost of transportation and warehousing services also increased strongly. There were also gains in prices of hotel and motel accommodation, airline fares, inpatient care as well as hardware, building materials and supplies retailing.

But the cost of securities brokerage, dealing and investment advice fell 5.4%. Portfolio management fees also decreased.

In the 12 months through March, the PPI jumped 11.2%, the largest year-on-year increase since the current series was introduced in November 2010, after advancing 10.3% in February. Economists polled by Reuters had forecast the PPI rising 1.1% and accelerating 10.6% year-on-year.

Russia's invasion of Ukraine has boosted prices for commodities such as crude oil, wheat and sunflower oil.

The Russia-Ukraine war, now in its second month, and lockdowns in China to contain a resurgence in COVID-19 infections, are seen further disrupting supply chains, worsening shortages of some goods.

The government reported on Tuesday that monthly consumer prices increased by the most in 16-1/2 years in March, but there is cautious optimism that inflation, which by all measures has way exceeded the Fed 2% target, has peaked.

The Fed in March raised its policy interest rate by 25 basis points, the first hike in more than three years. Minutes of the policy meeting published last Wednesday appeared to set the stage for big rate increases down the road.

Excluding the volatile food, energy and trade services components, producer prices accelerated 0.9% in March. The so-called core PPI increased 0.2% in February.

In the 12 months through March, the core PPI soared 7.0% after rising 6.7% in February.