US producer prices accelerated in January, boosted by strong gains in the cost of gasoline and healthcare, offering more evidence that inflation pressures were building up. While other data on Thursday showed an increase in the number of Americans filing for unemployment benefits, claims continued to point to a tightening labour market. Economists were also unfazed by an unexpected dip in industrial production last month, citing strong business sentiment surveys.
The relatively strong producer inflation report came on the heels of data on Wednesday showing a broad increase in consumer prices in January. Rising inflation was also corroborated by two regional manufacturing surveys on Thursday, which showed sharp increases in prices paid by factories for inputs. "The drumbeat of higher inflation is getting louder," said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. "It does appear as if higher inflation is here to stay."
Firming inflation could force the Federal Reserve to raise interest rate a bit more aggressively than is currently anticipated. The US central bank has forecast three rate increases this year, with the first hike expected in March. The Labour Department said its producer price index for final demand rose 0.4 percent last month after being unchanged in December. That lifted the year-on-year increase in the PPI to 2.7 percent from 2.6 percent in December.
A key gauge of underlying producer price pressures that excludes food, energy and trade services jumped 0.4 percent last month. The so-called core PPI edged up 0.1 percent in December. Core PPI rose 2.5 percent in the 12 months through January, the largest increase since August 2014. That followed a 2.3 percent gain in December. The cost of hospital outpatient care surged 1.0 percent in January, the largest increase since August 2014, after gaining 0.1 percent in December. There was also an increase in the price of hospital inpatient care.
Overall, the cost of healthcare services shot up 0.7 percent in January. These costs feed into the Fed's preferred inflation measure, the personal consumption expenditures (PCE) price index excluding food and energy. The Fed has a 2 percent inflation target. Following the CPI and PPI reports, Morgan Stanley is forecasting the core PCE price index rising 0.31 percent in January after increasing 0.2 percent in December.
That would raise the year-on-year increase in the core PCE price index to 1.6 percent from 1.5 percent in December. The data is scheduled for release on March 1. Wholesale goods prices increased 0.7 percent last month, after nudging up 0.1 percent in December. Gasoline prices, which rose 7.1 percent, accounted for nearly half of the increase in the cost of goods last month.
In a second report on Thursday, the Labour Department said initial claims for state unemployment benefits increased 7,000 to a seasonally adjusted 230,000 for the week ended February 10. Claims fell to 216,000 in mid-January, which was the lowest level since January 1973. Last week marked the 154th straight week that claims remained below the 300,000 threshold, which is associated with a strong labour market. That is the longest such stretch since 1970, when the labour market was much smaller.
The labour market is near full employment, with the jobless rate at a 17-year low of 4.1 percent. Last week, the four-week moving average of initial claims, considered a better measure of labour market trends as it irons out week-to-week volatility, rose 3,500 to 228,500. Another report from the Fed showed industrial production fell 0.1 percent in January as output at factories failed to increase for the second straight month. Industrial production, which rose 0.4 percent in December, was also weighed down by a 1.0 percent drop in mining output. A fourth report from the Philadelphia Fed showed factory
activity in the mid-Atlantic region accelerated in February amid a surge in demand for manufactured goods. Manufacturers reported hiring more workers.