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US producer prices expected to heap further pressure on Fed

US producer prices are expected to have notched another large monthly gain, reinforcing the Federal Reserve’s case to more rapidly remove the policy accommodation it has provided since the early days of the pandemic.

The producer price index, tracking the prices that businesses receive for their goods and services, is projected to have jumped 0.5 per cent in January, more than double the monthly pace registered the previous period, according to economists polled by Bloomberg.

That is scheduled to translate to an annual increase of 9.1 per cent, a decline from December’s 9.7 per cent surge but still historically elevated. Last year was the largest calendar-year increase in wholesale inflation since the data were first compiled in 2010.

The data will be published by the Bureau of Labor Statistics at 8:30am Eastern Time on Tuesday.

Once volatile items such as food and energy are stripped out, so-called core producer prices are expected to have increased at a more moderate clip of 0.4 per cent between December and January, or 7.8 per cent on a year-over-year basis. In December, those prices were 0.5 per cent higher month-on-month, or 8.3 per cent higher compared to the same time last year.

The new data come on the heels of an alarming inflation report, which last week showed US consumer prices climbing at the fastest annual pace in 40 years, at 7.5 per cent. High inflation has been an obstacle for President Joe Biden’s economic agenda as well as the Fed.

Investors have increased bets that the central bank will respond forcefully in an attempt to tame inflation, with some speculating at one point the Fed would convene an unscheduled meeting to raise interest rates prior to the next planned gathering in mid-March. However, the Fed is highly unlikely to make such a move given it typically reserves emergency adjustments for acute crises.

An increasing number of Wall Street economists have also pencilled in a half-point interest rate rise next month, although market pricing suggests traders broadly expect the central bank to stick to its typical cadence and deliver roughly seven quarter-point increases this year.

Fed officials appear split on how exactly to proceed after March, with Mary Daly, president of the San Francisco branch, on Sunday advocating for the central bank to be “measured” in its approach.

James Bullard, president of the St Louis Fed and a voting member on the policy-setting Federal Open Market Committee, on Sunday reiterated his call for a more rapid withdrawal of policy support and backed a 1 percentage point increase in the federal funds rate by July.

The Fed has maintained its benchmark interest rate at a range of 0 to 0.25 per cent since 2020.

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