Higher energy costs fuel US producer prices
Fed has limited view on Trump policies as Yellen heads to Congress
US producer prices rose more than expected in January, recording their largest gain in more than four years amid increases in the cost of energy products and some services, but a strong dollar continued to keep underlying inflation tame.
The Labor Department said yesterday its producer price index for final demand jumped 0.6 percent last month. That was the largest increase since September 2012 and followed a 0.2 percent rise in December. Despite the surge, the PPI only increased 1.6 percent in the 12 months through January. That followed a similar gain in the 12 months through December. Economists polled by Reuters had forecast the PPI rising 0.3 percent last month and the year-on-year increase moderating to 1.5 percent. The US dollar pared losses against a basket of currencies after the data. Prices of US Treasuries were mixed while US stock index futures were largely flat. The rise in producer prices comes as manufacturers report paying more for raw materials.
The Institute for Supply Management’s (ISM) prices index surged in January to its highest level since May 2011. The ISM index, which is closely correlated to the PPI, has increased for 11 straight months. The gains in PPI last month largely reflected increases in the prices of commodities such as crude oil, which are being boosted by a steadily growing global economy. Oil prices have risen above $50 per barrel. But with the dollar strengthening further against the currencies of the United States’ main trading partners and wage growth still sluggish, the spillover to consumer inflation from rising commodity prices is likely to be limited. A government report on Friday showed import prices excluding fuels fell in January for a third straight month. Data today is expected to show the consumer price index increased 0.3 percent in January after a similar gain in December, according to a Reuters survey of economists. Last month, prices for final demand goods increased 1.0 percent, the largest rise since May 2015. The gain accounted for more than 60 percent of the increase in the PPI. Prices for final demand goods advanced 0.6 percent in December.
Tepid growth
The US economy will get a small boost in 2017 from President Donald Trump’s planned deregulation and fiscal stimulus, a Reuters poll showed, but economists said the probability of achieving 4 percent growth was low. The latest results showed a wide gap between economists, who were criticized for being too optimistic late in the last economic cycle, and market expectations that have sent bond yields and the US dollar soaring and pushed Wall Street to record highs.
Trump has promised sweeping tax cuts for individuals and businesses, infrastructure spending, and deregulation to boost growth, which in the long recovery from the financial crisis has been weaker than in past expansions. Investors have taken those proposals as a green light to buy stocks since the US election, lighting a fire under financial shares in particular. But it is still not clear when the proposals will actually turn into legislation. All of the 58 economists who answered an extra question said the likelihood of the Trump administration achieving its aim of 4 percent growth this year was low.
“The markets have gone ahead of themselves,” said Ethan Harris, head of global economics at Bank of America Merrill Lynch. “They have not yet fully factored in the degree of the period of uncertainty we are about to enter here, and the risk that some of the policy proposals are very growth unfriendly.”
Only two economists polled on economic growth have forecasts of more than 4 percent growth, and not until in the second half. The consensus is for growth in a range of 2.1 percent to 2.5 percent in each quarter, unchanged since the January poll and barely moved since the poll taken after the US election. Since then, the S&P 500 index has rallied about 10 percent.
Federal Reserve Chair Janet Yellen goes to Congress yesterday for the first time since Republicans took control of the White House and both houses of the legislature with less clarity on the direction of US economic policy than at any time of her three-year tenure. The details of President Donald Trump’s economic policies remain largely unknown. — Agencies