US PPI rose 10% yr in February to keep Fed on track for rate hike

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U.S. 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% last month from February last year, the Bureau of Labor Statistics said Tuesday, the fastest annual rate since the data was released. collected for the first time in 2010 and in line with the January increase.

Producer prices rose 0.8% month on month, just below the 1% jump recorded between December and January.

So-called core producer prices, an underlying indicator of inflation, also rose at a more moderate pace. After excluding volatile items such as food, energy and trade, prices rose 6.6% in February from a year earlier, down from 6.9% in January and well below economists estimate for a 7.3% increase.

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

The report comes as the Federal Reserve begins a two-day meeting, after which the Federal Open Market Committee responsible for setting monetary policy is virtually guaranteed to raise interest rates for the first time since 2018.

Jay Powell, the seated chairman, signaled in congressional testimony earlier this month that the first rate hike would come in the form of a typical quarter-point increase, rather than a larger adjustment of half a point – which hasn’t been used since 2000 – which some officials had hinted might be appropriate given recent inflation data that shows US consumer prices are rising at the fastest rate in 40 years.

Powell left open the Fed’s option to raise interest rates with larger increases later this year, however, if inflationary pressures do not moderate sufficiently.

Economists fear that the war in Ukraine could drive headline inflation even higher, especially given the recent spike in energy prices following the Russian invasion and the unprecedented package of sanctions put in place by the United States and its allies.

The Fed is prepared to look past any slowdown in growth resulting from the crisis. The ‘dot chart’ of individual interest rate projections from senior Fed officials is expected to point to at least five interest rate hikes this year as the committee seeks to bring the federal funds rate closer to a level that no longer add housing.

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