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US PPI rose 10% annually in February to keep Fed on track for rate rise

US producer prices rose more moderately in February despite maintaining a record annual pace, keeping the Federal Reserve on track to raise interest rates this week.

The producer price index, which tracks the prices businesses receive for their goods and services, rose 10 per cent last month compared with February last year, the Bureau of Labor Statistics said on Tuesday, the fastest year-on-year rate since the data were first collected in 2010 and in line with January’s increase.

Producer prices gained 0.8 per cent month-on-month, just shy of the 1 per cent jump registered between December and January.

So-called core producer prices, an underlying gauge of inflation, also rose at a more moderate pace. After stripping out volatile items such as food, energy and trade, prices increased 6.6 per cent in February from the previous year, down from 6.9 per cent in January and well below economists’ estimates for a 7.3 per cent increase.

Ian Lyngen, head of US rates strategy at BMO Capital Markets, said despite the moderation, the data still showed “ample inflation in the system”.

The report comes as the Federal Reserve kicks off a two-day gathering, after which the monetary policy-setting Federal Open Market Committee is all but guaranteed to raise interest rates for the first time since 2018.

Jay Powell, the sitting chair, signalled at congressional testimonies earlier this month that the first rate rise would come in the form of a typical quarter-point increase, rather than a larger half-point adjustment — which hasn’t been used since 2000 — which some officials had hinted may be appropriate given recent inflation data that show US consumer prices rising at the fastest pace in 40 years.

Powell has left open the option of the Fed lifting interest rates by larger increments later on this year, however, if inflationary pressures do not moderate sufficiently.

Economists fear the war in Ukraine will further boost headline inflation, especially given the recent jump in energy prices following Russia’s invasion and the unprecedented package of sanctions rolled out by the US and its allies.

The Fed is set to look past any growth slowdown stemming from the crisis. The “dot plot” of individual interest rate projections of the Fed’s top officials is expected to signal at least five interest rate increases this year as the committee seeks to move the federal funds rate closer to a level that no longer adds accommodation.

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