U.S. Producer Prices Rise 0.2% on Higher Energy Costs/ Newslooks/ WASHINGTON/ J. Mansour/ Morning Edition/ U.S. producer prices rose 0.2% in December, driven by a 9.7% surge in gasoline costs. Annual wholesale inflation climbed to 3.3%, the highest since February 2023. Economists remain cautious as the Federal Reserve signals a slower pace of rate cuts for 2025 amid inflationary pressures.
Wholesale Inflation Rises: Quick Looks
- Monthly Increase: Producer prices up 0.2% in December, slower than November’s 0.4% gain.
- Energy Impact: Gasoline prices rose 9.7%, driving a 3.5% monthly increase in energy costs.
- Annual Inflation: Wholesale inflation climbed to 3.3% year-over-year.
- Core Inflation: Excluding food and energy, core producer prices were flat month-over-month, up 3.5% annually.
- Fed Outlook: Cautious on rate cuts in 2025, citing inflationary risks from tariffs and tax cuts.
Deep Look:
Producer Price Trends in December
The Labor Department reported on Tuesday that the producer price index (PPI), a measure of wholesale inflation, rose 0.2% in December, slightly below economists’ expectations. Compared to December 2023, producer prices increased 3.3%, marking the highest year-over-year gain since February 2023.
Energy prices were the primary driver of the monthly increase, climbing 3.5%, with gasoline prices surging by 9.7%. Meanwhile, food prices dipped 0.1%, providing a modest offset.
Core Inflation Remains Steady
When excluding volatile food and energy prices, core PPI remained unchanged from November but was up 3.5% compared to a year earlier. Core inflation offers a clearer picture of underlying price trends and is closely monitored by the Federal Reserve.
Impact on Markets and Fed Policy
The modest rise in producer prices was enough to boost U.S. markets, which reacted positively to the slightly lower-than-expected inflation figures. However, the Federal Reserve remains cautious about easing monetary policy further, signaling only two rate cuts for 2025 compared to four projected in September.
Inflationary pressures have stalled progress in recent months, with consumer prices remaining above the Fed’s 2% target. The central bank is expected to leave rates unchanged at its next meeting on January 28-29.
Upcoming Consumer Inflation Report
The PPI data precedes the highly anticipated consumer price index (CPI) report due Wednesday. Analysts expect a 0.3% monthly rise and a 2.8% annual increase in consumer prices, according to FactSet forecasts. Wholesale prices often provide early indicators of future consumer inflation trends.
Long-Term Inflation Concerns
Economists remain wary of inflationary risks tied to President-elect Donald Trump’s economic agenda. Proposed tariffs on foreign goods and tax cuts could increase demand and limit supply, putting upward pressure on prices.
Carl Weinberg, chief economist at High Frequency Economics, noted that the Fed is unlikely to hasten rate cuts under these conditions. “Better-than-expected is not necessarily what the Fed wants to see before easing monetary conditions into a fast-growing economy,” Weinberg said.
Historical Context and Fed Actions
Inflation surged in 2021 as the economy rebounded from the pandemic, leading to supply chain disruptions and higher prices. The Federal Reserve raised its benchmark interest rate 11 times between 2022 and 2023 to combat inflation. This strategy brought inflation down from its mid-2022 peak, but progress has slowed in recent months.
In 2024, the Fed reversed course, cutting rates three times as inflation eased. However, the central bank now projects a more cautious approach to monetary easing in 2025, keeping a close eye on economic growth and inflationary risks.
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