This morning’s update on February wholesale prices should give the Federal Reserve something to think about.
At its worst, the continued rise in core producer prices last month is another sign that inflationary momentum is building in the manufacturing pipeline. Perhaps it’s just a temporary blip. But until and if future reports suggest otherwise, prudence dictates that monetary policy should err on the side of caution. Inflation isn’t easily put back in the proverbial bottle. Meanwhile, keeping it from seeping out in the first place is much easier and, in the long run, more productive for the economy.
As for today’s PPI numbers, here’s how it stacks up. Top-line PPI jumped 1.3% in February, the highest last November and near the highest monthly figures posted in recent years. On a 12-month basis, PPI is now rising by 2.6% a year, the highest since last summer. The respite in upward wholesale pricing pressure from last July through October now appears to be fading.
It’s tempting to say that energy is the sole cause for the latest price surge. Indeed, energy prices jumped 3.5% for finished goods last month, nearly reversing the 4.6% decline in January. But if you strip out food and energy from PPI, there’s still something to worry about. Core PPI last month rose by 0.4%, twice as much as January’s increase. On a 12-month basis, core PPI is advancing by 1.8%. That’s not the end of the world, but it’s up sharply from last summer. The question is whether the momentum has legs.
It’s too early to hike rates, although it’s also too soon to start cutting. For the moment, we can only wait for tomorrow’s consumer price report for February for a deeper understanding of price trends. But after looking at the latest PPI numbers, we’ll be that much more skeptical when digesting the CPI update for February.