US producer inflation heats up even before Middle East conflict

WASHINGTON – US producer prices increased by the most in seven months in February, driven by higher costs for services and a range of goods, and could accelerate further as the war in the Middle East boosts oil prices and the tariff pass-through persists.

The stronger-than-expected Producer Price Index report from the Labour Department on March 18 also suggested that a key inflation measure tracked by the Federal Reserve for monetary policy posted a third straight month of solid gains in February.

The US-Israeli war with Iran, which started at the end of February, has sent oil prices surging more than 40 per cent. Economists expected the war’s inflationary impact to show up in the March consumer and producer price reports in April.

The US central bank is expected to hold interest rates steady at the end of a two-day policy meeting later on March 18. Fed officials will ⁠submit new economic projections, which economists expect to show upgrades to inflation estimates. Financial markets are expecting only one rate cut in 2026.

“The upshot is there is nothing in the price data that suggests the Fed would be in a position to cut again soon even if oil prices suddenly dropped back,” said economist Thomas Ryan, North America economist at Capital Economics.

The Producer Price Index (PPI) for final demand surged 0.7 per cent in February, the most since July 2025, after an unrevised 0.5 per cent increase in January, the Labour Department’s Bureau of Labour Statistics said.

Economists polled by Reuters had forecast the PPI gaining 0.3 per cent. In the 12 months through February, the PPI increased 3.4 per cent. That was the largest gain in a year and followed a 2.9 per cent advance in January.

A 0.5 per cent rise in services accounted for more than half of the increase in the monthly PPI. Services advanced 0.8 per cent in January. Services, which have now posted three straight months of strong gains, were lifted by a 5.7 per cent jump in wholesale prices of hotel and motel rooms.

Trade services, which measure changes in margins received by wholesalers and retailers, rose 0.4 per cent. That indicated that businesses were not absorbing all of President Donald Trump’s sweeping tariffs, though margins for apparel, footwear and accessories retailing fell 4.5 per cent. The cost of transportation and warehousing services increased 0.5 per cent.

Producer prices increased across the board

There were increases in the prices for food and alcohol wholesaling, securities brokerage, dealing, investment advice and related services as well as fuels and lubricants retailing, and long-distance trucking. The cost of hospital inpatient care rebounded 0.6 per cent, but prices for physician care were unchanged. Wholesale airline fares dropped 0.6 per cent.

Some of these services components, including securities brokerage, hospital inpatient care and hotel and motel rooms go into the calculation of the Personal Consumption Expenditures (PCE) price index, excluding the volatile food and energy components.

The so-called core PCE price index is one of the metrics tracked by the Fed for its 2 per cent inflation target. After the PPI data, economists maintained their estimates that core PCE inflation increased 0.4 per cent in February. That would mark the third straight month that the core PCE price index would have risen by 0.4 per cent, more than double the monthly pace of increase that economists say is needed on a sustained basis to bring inflation back to its target.

Core PCE inflation was estimated to have increased 3.1 per cent year on year in February, which would match January’s rise. The Bureau of Economic Analysis will publish the delayed February PCE inflation report in April.

Producer goods prices soared 1.1 per cent in February, the largest increase since August 2023, after falling for two consecutive months. A 2.4 per cent rise in food prices amid a 48.9 per cent jump in the cost of fresh and dry vegetables accounted for the rise in goods prices. Wholesale energy prices rebounded 2.3 per cent, with the cost of gasoline rising 1.8 per cent and natural gas liquids increasing 6.6 per cent.

In addition to raising energy prices, economists expected the Middle East conflict to boost food costs through fertiliser shortages. REUTERS