US producer prices post biggest gain in five months, businesses passing on tariffs
Another shutdown is looming at midnight, though it could be brief
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[WASHINGTON] US producer prices increased by the most in five months in December amid some pass-through from import tariffs, suggesting inflation could pick up in the months ahead and allow the US Federal Reserve to keep interest rates steady for a while.
The larger-than-expected rise in the Producer Price Index (PPI) last month reported by the Labor Department on Friday (Jan 30) was driven by a surge in services, mostly trade services, which measure changes in margins received by wholesalers and retailers. There were also strong increases in the prices of hotel and motel rooms as well as airline fares. But goods prices were unchanged.
The US central bank on Wednesday left its benchmark overnight interest rate in the 3.5 to 3.75 per cent range. Fed chair Jerome Powell attributed the overshoot in inflation to tariffs, adding “but there’s an expectation that sometime in the middle quarters of the year we’ll see tariff inflation topping out”.
“This report validates the pivot of the Fed away from labour market risks back towards price stability,” said Carl Weinberg, chief economist at High Frequency Economics.
The PPI for final demand jumped 0.5 per cent last month, the biggest rise since July, after an unrevised 0.2 per cent gain in November, the Labor Department’s Bureau of Labor Statistics (BLS) said. Economists polled by Reuters had forecast the PPI climbing 0.2 per cent.
In the 12 months to December, the PPI increased 3 per cent after rising by the same margin in November. The PPI advanced 3 per cent in 2025 after rising 3.5 per cent in 2024. The BLS is now caught up on the PPI and Consumer Price Index releases that were delayed by the 43-day shutdown of the federal government. Another shutdown is looming at midnight, though it could be brief.
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US Senate Democrats and President Donald Trump reached a deal on Thursday that would allow Congress to pass a spending bill that covers a wide swath of government operations, including at the Labor Department, while they negotiate new limits on Trump’s immigration crackdown.
Even if the Senate passes the deal, it would also have to win approval from the Republican-controlled House of Representatives, which is out of session this week. The BLS’ closely watched employment report for January is scheduled for release next Friday, with the CPI report due a week after.
The PPI inflation data was overshadowed by Trump’s nomination of Kevin Warsh to replace Powell when his term at the helm of the central bank ends in May. Warsh is a former Fed governor and frequent critic of the central bank.
Stocks on Wall Street were trading lower. The US dollar regained some ground against a basket of currencies after a sharp sell-off earlier in the week. US Treasury yields rose.
A 0.7 per cent increase in services accounted for the rise in the PPI last month. They were driven by a 1.7 per cent jump in margins for final demand trade services, which made up two-thirds of the increase in services.
Businesses have been absorbing some of Trump’s sweeping import tariffs, preventing a sharp increase in inflation.
“This PPI component is highly volatile and subject to revisions, but suggests businesses have been able to pass along some of the costs from tariffs as higher prices,” said Michael Hanson, an economist at JPMorgan. “With inflation continuing to run meaningfully above target and some uncertainty about how tariffs will impact the path for consumer prices this year, we expect policy to remain on hold for a time.”
The cost of services less trade, transportation and warehousing increased 0.3 per cent, while prices for transportation and warehousing services rose 0.5 per cent. Portfolio management fees increased 2.0 per cent after gaining 1.4 per cent.
Airline fares soared 2.9 per cent while wholesale prices of hotel and motel rooms surged 7.3 per cent. These categories are among the components that go into the calculation of the Personal Consumption Expenditures (PCE) price indexes, the inflation measures tracked by the Fed for its 2 per cent target. Economists’ estimates for December core PCE inflation converged at a 0.4 per cent increase, which would translate into a year-on-year rise of 3.0 per cent.
The PCE inflation data for December is due to be released on Feb 20. The core PCE price index has risen by 0.2 per cent for five straight months. Core PCE inflation increased 2.8 per cent year-on-year in November.
Producer goods prices were unchanged in December after increasing 0.8 per cent in November. Energy prices dropped 1.4 per cent after rebounding 3.7 per cent in November. They were held down by lower petrol prices. Food prices fell 0.3 per cent amid a 20.4 per cent plunge in the cost of fresh and dry vegetables, which likely reflected the rolling back of some tariffs by the Trump administration to lower costs for consumers.
Food prices were unchanged in the prior month. Excluding food and energy, producer goods prices advanced 0.4 per cent after rising 0.2 per cent in November.
Economists remained optimistic that inflation would subside by year end, driven by services.
“We are already pencilling in some stronger consumer goods prices at the start of the year, as January and February may be a natural time to raise prices,” said Veronica Clark, an economist at Citigroup. “But we continue to expect more slowing in details of services inflation into 2026 that would be more indicative of underlying slowing in inflation.” REUTERS
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