U.S. producer prices climbed 0.7% in February, led by gains in service-sector components, the Labor Department's Bureau of Labor Statistics reported. The rise exceeded economists' expectations of a 0.3% increase and followed an unrevised 0.5% gain in January.
The 12-month change in the Producer Price Index for final demand moved to a 3.4% gain through February, up from a 2.9% advance recorded in January. The PPI data include components that feed into broader consumer inflation measures tracked by policymakers.
Energy markets are adding to upward price pressure. The U.S.-Israeli war with Iran, which started at the end of February, has propelled oil prices to surge by more than 40%. Economists expect the inflationary consequences of that escalation to be reflected in the March producer and consumer price reports released next month.
Policymakers at the Federal Reserve are poised to keep its policy rate steady at the conclusion of a two-day meeting. Fed officials will release updated economic projections, and economists anticipate those forecasts will show upward revisions to inflation estimates. Financial markets, meanwhile, are pricing in only one rate cut later this year.
Some subcomponents of the PPI and the Consumer Price Index are used in calculating the Personal Consumption Expenditures price indexes, which are the inflation measures the Fed follows in pursuit of its 2% objective.
Before the PPI release, economists had estimated the core PCE price index - which excludes volatile food and energy categories - rose 0.4% in February. If realized, that would mark a third consecutive month of 0.4% monthly increases, a pace that is more than double the monthly rate generally viewed as necessary to return inflation to target on a sustained basis. Core PCE inflation was estimated to have increased 3.1% year-on-year in February, matching the January reading.
The Bureau of Economic Analysis is scheduled to publish the delayed February PCE inflation report next month. That release will provide additional data on the consumer-side inflation trajectory and help inform expectations for monetary policy and market positioning.
Summary of developments
Producer prices rose 0.7% in February, driven by services. Annual PPI inflation accelerated to 3.4%. A sharp rise in oil prices following the outbreak of the U.S.-Israeli war with Iran is expected to contribute further to inflation readings in March. The Fed is expected to hold rates and to update economic projections that likely reflect higher inflation estimates.