U.S. producer prices recorded their largest gain in more than four years in January amid increases in the cost of energy products, but a strong dollar continued to keep underlying inflation at the factory gate tame.
Rising raw material costs are boosting producer prices across the globe, notably in China, which is the biggest source of U.S. imports. But economists still expect overall U.S. inflation to keep climbing gradually given the buoyant dollar.
“China saw the biggest price gain since 2011 in January. Given that most of the upward price pressure is the result of raw materials prices returning from the depths of last year, the longer-term view continues to be wary but not alarmed,” said Jay Morelock, an economist at FTN Financial in New York.
The U.S. Labor Department said on Tuesday its producer price index for final demand jumped 0.6% last month, which was the biggest rise since September 2012 and followed a 0.2% gain in December. Higher prices for some services also contributed to the increase in January.
Economists had expected the PPI to rise 0.3% in January. Despite the surge, the PPI only increased 1.6% in the 12 months through January after a similar gain in December. A measure of underlying producer price pressures that excludes food, energy and trade services advanced 0.2% after edging up 0.1% in December. The Federal Reserve has a 2% inflation target.
Gradually rising inflation together with a tightening labor market and firming economic growth should position the Fed to continue raising interest rates this year. The U.S. central bank raised rates in December and projected three more hikes in 2017.
More U.S. manufacturers are reporting paying higher prices for raw materials. The Institute for Supply Management’s (ISM) prices index surged in January to its highest level since May 2011.
Closely correlated to the PPI, the ISM index has advanced for 11 straight months. Those gains largely reflected increases in the prices of commodities such as crude oil, which are rising due to a steadily growing global economy. Oil prices have climbed above US$50 per barrel.