Inflation worries are ticking up again, with another inflation report showing price increases picking up steam, which could mean several more interest rate hikes ahead.
Producer prices, or those charged by manufacturers, farmers and wholesalers, jumped 0.7% in January after dipping 0.2% in December. It was the largest gain since June and nearly double what economists had forecasted.
Over the 12 months to January, prices rose 6%, which was also more than economists had predicted but slower than December’s 6.5%.
Because producer prices are often seen as a precursor to what consumers might see, some economists are on edge, now forecasting a more difficult path back to the Federal Reserve’s 2% inflation goal.
This morning’s data are “more red meat for the Fed’s inflation hawks,” said Comerica chief economist Bill Adams. Hawks are focused on tightly controlling inflation, usually with interest rate hikes.
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What do economists think this could mean for interest rates?
After January’s consumer price report on Tuesday, some economists were already worried.
While overall annual consumer inflation eased slightly last month to 6.4% from 6.5% in December and the core rate, which excludes volatile food and energy prices, slipped to 5.6% from 5.7%, inflation rose on a three- and six-month basis. Economists look at three- and six-month annualized numbers to get a broader look at trends.
Core CPI rose to 4.6% in January over three months from 4.3% in December and to 5.3% from 5.1% over six months.
Add to that this morning’s producer price report, and more economists are revising up their rate forecasts.
Deutsche Bank raised its forecast for the short-term federal funds rate this year to 5.6% from 5.1% previously and 4.5% to 4.75% currently. Comerica’s Adams now expects the Fed to raise its fed funds rate a quarter percentage point at each of their next three meetings, in March, May, and June, leaving it in a range of 5.25% to 5.50% before pausing.
In December, Adams had predicted the last rate hike before a pause would be in March.
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What do Fed members think about inflation?
Cleveland Fed president Loretta Mester said this morning that just two weeks ago when the Fed last met and before this week’s consumer and producer inflation reports, she “saw a compelling economic case for a 50-basis-point increase, which would have brought the top of the target range to 5%.”
The Fed raised its fed funds rate by a quarter point at its last meeting earlier this month.
On Tuesday, Dallas Fed president Lorie Logan suggested the easing inflation we’ve seen in the last few months could be coming to an end soon.
“Core goods prices fell at a 3% annual rate in the last three months of 2022, partially offsetting rapid increases in services prices,” she said. “Goods prices dropped in part because supply chains were recovering from the disruptions of the pandemic. Supply chains can’t recover twice.”
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
