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Unexpected Surge in Wholesale Prices in April Challenges Hopes for Interest Rate Cuts

Updated: 3 days ago

In April, wholesale prices surged unexpectedly, suggesting that interest rate reductions might not be on the horizon.


The producer price index (PPI), which measures wholesale-level prices, rose by 0.5% in the month, surpassing the 0.3% increase forecasted by Dow Jones, according to data from the Labor Department's Bureau of Labor Statistics released on Tuesday. Notably, the figure for March was adjusted from an initially reported 0.2% rise to a 0.1% decrease.


When removing the fluctuating costs of food and energy, the core PPI also climbed by 0.5%, exceeding the anticipated 0.2%. Excluding trade services, this core group saw a 0.4% monthly increase and a 3.1% increase over the past 12 months, marking the highest rate since April of the previous year.


Year-over-year, wholesale inflation escalated to 2.2%, the highest in a year, with core PPI inflation reaching 2.4%, the most significant annual increase since August of the previous year. Both figures aligned with Reuters' predictions.


The stock market futures remained stable following the release, while Treasury yields showed mixed reactions.


Chris Larkin, managing director of trading and investing at E-Trade from Morgan Stanley, commented, "Inflation seems entrenched after today's unexpectedly high inflation figures. However, with the downward revision of last month's numbers, the impact might be less shocking than initially perceived."


Service prices primarily drove the increase in wholesale inflation, rising by 0.6% and contributing to three-quarters of the overall growth, as reported by the BLS. The most substantial monthly increase in services since July of the previous year was noted.


The cost of portfolio management services notably surged by 3.9% within the month.


In terms of goods, the PPI rose by 0.4%, countering a prior 0.2% drop. This increase was led by a 2% rise in the energy index, which included a 5.4% jump in gasoline prices. Conversely, the food index fell by 0.7%.


This inflation data emerges while the Federal Reserve maintains a cautious stance on interest rates, requiring more proof of a steady decline toward their 2% inflation target before considering rate cuts.


Other inflation indicators like the consumer price index and the Commerce Department’s personal consumption expenditures price index have also reported higher-than-expected increases early in 2024, indicating persistent inflationary pressures.


Moreover, consumer expectations for inflation remain elevated, with the New York Fed's latest monthly survey showing a one-year inflation outlook of 3.3%, the highest since November, largely driven by anticipated rises in housing costs.


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