Producer prices rose in March, but were much lower than expected as rising energy prices brought on by the Iran war reignited concerns that inflation would flare up again.
The Producer Price Index, a measure of pipeline costs for final demand goods and services, rose a seasonally adjusted 0.5% for the month, well below the Dow Jones consensus estimate of 1.1%, according to a Bureau of Labor Statistics report on Tuesday.
Core PPI, which excludes food and energy, rose only 0.1%, compared to the expected 0.5% rise. The services side of inflation, a key focus for Fed policymakers, was flat during the month.
On an annual basis, the all-item PPI accelerated by 4%, the largest 12-month increase since February 2023. Core PPI rose 3.8% for the year. PPI, which excludes food, energy and trade services, rose 0.2% for the month and 3.6% for the year. Traded services fell 0.3% for the month, showing that businesses are absorbing tariff costs.
The increase in prices for producers was less than the 0.9% increase in prices actually paid by consumers that month. Core consumer prices were also weak, rising just 0.2%.
Still, the component of the report that is directly reflected in the Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditure Price Index, showed more robustness. Portfolio management fees rose another 1%, and healthcare-related services also increased.
Combining the Consumer Price Index and Producer Price Index and how they are reflected in PCE inflation, Bank of America estimated that the composite index would be at an annual rate of about 3.1% in March, and the core index at about 3.5%. This compares to February’s respective levels of 2.8% and 3%.
BofA economist Stephen Juneau said the trend “should keep Fed policy firmly on hold in the near term.”
As expected, energy was the main driver of the PPI increase. The gasoline index rose 15.7%, accounting for about half of the PPI increase, according to the BLS. Diesel prices alone rose 42%, while jet fuel rose 30.7%.
As a result, commodity prices rose by 1.6%, offset by flat service costs. Fed officials view service costs as an important indicator that excludes the effects of tariffs and wars.
Portfolio management costs, which were pushing up producer prices at the beginning of the year, rose 1% in the month and rose 10.8% annually.
The market reacted little to the report, with stock market futures recording a modest gain. Government bond yields were little changed.
While some inflation indicators in March indicate a resurgence in price pressures, Fed policymakers are likely to wait to see whether the underlying conditions are benign and whether the equally important Iranian ceasefire holds.
Energy prices have fallen somewhat since the announcement of the cessation of fighting. U.S. light sweet crude oil is up nearly 70% this year, but has fallen nearly 15% in the past week.
Fed officials have expressed some caution about the impact of the war, but they generally expect inflation to continue easing through the rest of the year, returning to the central bank’s 2% target.
Still, the market expects the Fed to keep rates on hold for the rest of the year, and has priced in a roughly 1 in 4 chance of a rate cut by December.
