Inflation concerns heat up again! U.S. January PPI increase surpasses expectations across the board

U.S. Producer Price Index (PPI) for January rose more than expected, indicating that companies may be passing higher costs from import tariffs downstream, suggesting that inflationary pressures could intensify in the coming months. The latest inflation data also caused a sharp decline in U.S. stocks at the open.

The U.S. Bureau of Labor Statistics reported on Friday that the January PPI year-over-year increased by 2.9%, compared to an expected 2.6% and a previous value of 3.0%. The January PPI month-over-month was 0.5%, versus an expected 0.3%, with the previous figure revised from 0.5% to 0.4%.

Excluding volatile food and energy categories, the core PPI in January rose 3.6% year-over-year, versus an expected 3.0% and a previous 3.3%; month-over-month, it increased by 0.8%, compared to an expected 0.3%, with the previous figure revised from 0.7% to 0.6%.

The PPI increase was mainly driven by service prices. Data showed that service prices surged 0.8% month-over-month. Notably, “trade services” prices, which measure wholesale and retail profit margins, rose 2.5%. Wholesale profit margins for professional and commercial equipment soared 14.4%, indicating that companies are passing tariff costs onto customers.

Additionally, prices increased in several sectors including apparel, footwear, and accessories retail; chemicals and related products wholesale; bundled sales of wired communication access services; retail of health, beauty, and optical products; and food and alcohol retail.

Due to the U.S. federal government’s brief shutdown earlier this month, the release of this report was delayed.

Looking at commodity categories, energy prices fell 2.7% in January, and food prices declined 1.5%. However, core goods prices, excluding food and energy, rose sharply by 0.7%.

Some components of the PPI will be incorporated into the calculation of the Personal Consumption Expenditures (PCE) Price Index, which is the Federal Reserve’s most closely watched core inflation indicator.

Before the PPI data was released, economists expected that the January core PCE inflation could rise as much as 0.5% month-over-month, corresponding to about 3.1% year-over-year.

Chris Zaccarelli, Chief Investment Officer of Northlight Asset Management, said that the higher-than-expected January PPI increase has heightened Wall Street’s concerns about rising inflation, potentially shifting market focus away from the disruptive impact of artificial intelligence (AI), and providing the Fed with reasons to remain cautious before adjusting monetary policy.

He stated, “The higher inflation data released this morning adds another concern to the traditional macro analysis centered on ‘price stability and full employment,’ even before investors have fully considered AI’s potential disruptive impact on the economy.”

David Morrison, Senior Market Analyst at TradeNation, commented that investors had already been worried about how the higher-than-expected PPI might impact the market, and the current trend confirms this scenario.

He said, “Market concerns about U.S. inflation are heating up, and it looks like inflation may rise again. Last week, the core PCE year-over-year increased by 3.0%, still significantly above the Fed’s 2% target.”

However, some market participants pointed out that despite the stock sell-off, U.S. Treasury yields continued to decline, indicating that bond investors do not see the PPI as the main driver of market movements on Friday.

(Source: Cailian Press)