U.S. Economic Brief || Producer Price Index elevated in February, driven by surge in energy prices

Producer Price Index elevated in February, driven by surge in energy prices

*The U.S. Producer Price Index (PPI) for final demand increased 0.8% m/m in February, while January’s m/m increase was revised up to 1.2%, leaving the yr/yr increase unchanged at a record-high 10% in February using the PPI’s new methodology (Chart 1). The steep m/m increase in the PPI in February was driven by sharp increases in energy and goods prices. The recent spike in commodity prices associated with Russia’s invasion of Ukraine and the risk of further disruption to manufacturing and distribution of goods in China are likely to accentuate inflationary pressures in the near term and raise production costs.

*The core PPI for final demand (excluding volatile energy, foods, and trade services components), a more reliable gauge of underlying price trends, advanced a modest 0.2% m/m, while the yr/yr increase fell 0.2pp to 6.6%, its lowest level since October. Although the yr/yr rate of increase in the core PPI remains elevated, it continues to moderate – on a six-month annualized basis, the core PPI increased 5.8% in February, down from 8% in August, suggesting that core inflationary pressures may have begun to ease (Chart 2).

*Near-term headline inflationary pressures are elevated. Final demand energy prices jumped 8.2% m/m in February and rose 3.7% m/m in January, lifting the yr/yr increase to 33.8%, while final demand foods prices increased 1.9% m/m in February and 13.7% yr/yr (Chart 3). Moreover, the pipeline of inflationary pressures suggests further price increases in the next few months are likely. The prices of unprocessed goods for intermediate demand jumped 14.6% m/m in February, the largest one-month increase since 2001, and prices are 75% higher than in February 2020. Thus far, strong demand has provided businesses with the flexibility to pass on rising input costs to consumers, but declining real purchasing power and recent hits to consumer confidence could begin to dampen the extent to which businesses are able to raise prices.

*Final demand services prices were flat in February, prompting a 0.3pp decline in the yr/yr increase to 7.8%. Services prices have increased sharply in recent months, rising 10.4% on a four-month annualized basis. Notably, prices of transportation and warehousing of goods for final demand increased a robust 1.6% m/m and have increased 21.8% since February 2020, reflecting sustained supply chain bottlenecks and disruptions to product distribution. Prices for finished consumer goods (excluding food and energy) increased 0.9% m/m, lifting their yr/yr increase to 7.4% and pointing to continued strong demand for durable and consumer good despite elevated prices (Chart 4). The rise in COVID-19 infections associated with the omicron variant slowed the anticipated shift in the composition of consumption from goods to services, keeping goods demand elevated and contributing to rising prices, while material and labor shortages continue to constrain the supply of goods.

Chart 1.

Chart 2.

Chart 3.

Chart 4.

Mickey Levy, mickey.levy@berenberg-us.com

Mahmoud Abu Ghzalah, mahmoud.abughzalah@berenberg-us.com

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