The Producer Price Index (PPI), which measures inflation on the wholesale level, rose 0.6% in February, doubling market estimates. On an annual basis, PPI rose from 1% to 1.6%, well above the 1.1% that was forecasted. Core PPI, which strips out volatile food and energy prices, was hotter than expected with a 0.3% rise. The year-over-year reading remained at 2%, just above forecasts.
What’s the bottom line? Despite the upside surprise in the data, wholesale inflation is still well below 2022’s peak. February’s 1.6% year-over-year reading is a sharp drop from the 11.7% high that was reached a few years ago.
Remember, the Fed began aggressively hiking the Fed Funds Rate (the overnight borrowing rate for banks) in March 2022. These hikes were designed to slow the economy by making borrowing more expensive, lowering the demand for goods, and thereby reducing pricing pressure and inflation. After eleven hikes in this cycle, the Fed pressed pause at their last four meetings as signs of cooling inflation grew.
While the Fed is still expected to start cutting the Fed Funds Rate this year, these hotter than expected inflation readings could push back the timing of their plans. We will likely receive more guidance on Wednesday once this week’s Fed meeting concludes, and they release their latest Statement of Economic Projections.
The last update in December showed that Fed members projected a median of three rate cuts for this year. It will be important to see whether recent inflation and employment data impact these forecasts.