The year-on-year increase in the U.S. January PPI is the highest in nearly two years, but the part related to PCE inflation shows moderate signs

Due to rising food and energy costs, the U.S. Producer Price Index (PPI) wholesale prices accelerated in January, highlighting the stalled progress in cooling inflation in the U.S. However, there are positive aspects to the data: the Federal Reserve's preferred inflation indicator—the Personal Consumption Expenditures Price Index (PCE)—shows that the price increases in this segment are moderate.

On Tuesday, February 13, the U.S. Bureau of Labor Statistics reported:

The U.S. January PPI rose 3.5% year-on-year, higher than the previous and expected values of 3.3%, marking the highest level since February 2023; it increased 0.4% month-on-month, exceeding the expected value of 0.3%, but lower than the previous value of 0.5%. It is worth noting that the previous value was revised up from 0.2%, complicating the inflation outlook.

The core PPI, excluding food and energy, rose 3.6% year-on-year, higher than the previous value of 3.5% and the expected value of 3.3%; it increased 0.3% month-on-month, in line with expectations, but lower than the revised previous value of 0.4%.

Subcategory Data

Overall commodity prices increased by 0.6%, marking the third consecutive month of significant increases. The PPI report shows that food prices rose by 1.1%, with egg prices soaring 44% from the previous month due to an outbreak of avian influenza in the U.S. Energy prices increased by 1.7%, with a significant factor being the 10.4% rise in diesel costs.

Excluding food and energy, commodity prices only slightly increased by 0.1%, marking the second consecutive month of modest gains.

Overall, commodity prices have been climbing this year. The Bloomberg Commodity Index is close to its highest level since May last year, partly due to rising prices for metals, corn, and coffee.

Meanwhile, the PPI report indicates that service prices rose by 0.3%. The U.S. Bureau of Labor Statistics stated that one-third of this increase is attributed to the surge in travel accommodation service costs, which rose by 5.7%. The costs of portfolio management services increased for the second consecutive month; this category is included in the PCE index and largely reflects the performance of the U.S. stock market.

Some categories show a slightly milder inflation outlook. For example, physician consultation fees decreased by 0.5%, domestic airfare prices fell by 0.3%, and brokerage service fees dropped by 2.2%.

PCE-Related Components

Economists are closely monitoring this PPI report, as several of its components are included in the Federal Reserve's preferred inflation indicator—the Personal Consumption Expenditures Price Index (PCE). The PPI report indicates that these categories performed favorably in January, with most healthcare items and airfare prices showing declines Paul Ashworth, Chief North America Economist at Capital Economics, stated in a report:

Overall, the components that make up the Fed's preferred PCE price index appear very mild. This is better than yesterday's news on price inflation, but core PCE is still well above the 2% target.

According to Citigroup's estimates, based on the comprehensive PCE-related data released, the core PCE index for January, which is expected to be released later this month, may see a month-on-month increase of 0.22%, down from 0.45% in December, which would bring the annual inflation rate down to 2.5%.

Nick Timiraos, a well-known financial journalist known as the "new Fed communicator," posted:

Due to the weak performance of the producer price index (PPI) components—financial and healthcare services—in January, the increase in the core PCE index is expected to be much lower than the 0.45% increase in the consumer price index (CPI). A 0.27% rise in the core PCE index in January would reduce the year-on-year growth rate from 2.8% to 2.6%.

Analysis and Commentary

Following yesterday's CPI inflation data exceeding expectations, the U.S. January PPI also remained strong, indicating limited progress on inflation before the tariffs imposed by the Trump administration. This data significantly reduces the likelihood of the Fed cutting rates more than once in 2025. Some economists even predict that due to the impact of increased tariffs on imported goods, the Fed will not take any rate-cutting measures.

CNBC cited industry insiders noting that the January PPI price increase was slightly higher than expected, and the wholesale price increase for December was also revised upward. Inflation at the producer level remains high, and there are concerns that this inflation may eventually be passed on to consumers.

Fed Chairman Jerome Powell told lawmakers this week that inflation expectations "seem to remain stable," allowing for a patient adjustment of interest rates. However, the proposed tariffs in Trump's policies have introduced some uncertainty into the U.S. economic outlook.

After the latest PPI data was released, U.S. stock futures rose briefly, while the yield on the 10-year U.S. Treasury and the dollar fell slightly. These dovish market reactions are related to the overall mild increase in the categories that make up the Fed's preferred PCE inflation indicator