Key Points

The Producer Price Index (PPI), which measures upstream costs for final demand goods and services, increased by a seasonally adjusted 0.5% month-over-month, falling well short of the Dow Jones consensus estimate of 1.1%. The core PPI, which excludes food and energy, rose just 0.1% compared to the previous month, against an expected increase of 0.5%. On an annual basis, the headline PPI increased by 4%, marking the largest 12-month gain since February 2023. The core PPI advanced 3.8% year-over-year.

Wholesale price increases in March fell significantly short of expectations, even as conflict involving Iran drove up energy costs and renewed concerns about a resurgence of inflation. A report released Tuesday by the U.S. Bureau of Labor Statistics showed the Producer Price Index increased 0.5% on a seasonally adjusted monthly basis, far below the market consensus forecast of 1.1%. The core PPI, which strips out the volatile food and energy categories, rose a modest 0.1% for the month, against expectations for a 0.5% gain. Inflation for services, a key focus for Federal Reserve policymakers, was unchanged in March. Year-over-year, the headline PPI was up 4%, the largest annual increase since February 2023, while the core PPI rose 3.8%. Excluding food, energy, and trade services, the PPI increased 0.2% for the month and 3.6% over the past year. A 0.3% monthly decline in trade services prices suggests businesses are absorbing some tariff-related costs. The increase in producer-level prices was softer than the 0.9% monthly rise in actual consumer prices paid. Core consumer price increases were also moderate, rising just 0.2%. However, components of the report that feed directly into the Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, showed more strength. Portfolio management fees increased again by 1%, and prices for medical care services also moved higher. Based on an analysis integrating consumer and producer price data and their impact on PCE inflation readings, Bank of America estimates the March headline PCE will be around 3.1% year-over-year, with core PCE around 3.5%. These figures compare to 2.8% and 3.0%, respectively, in February. "This trend 'should keep the Fed firmly on hold in the near term,'" wrote Stephen Juneau, an economist at Bank of America. As anticipated, energy was the primary driver behind the PPI increase. Data from the Bureau of Labor Statistics indicated the gasoline price index surged 15.7%, accounting for roughly half of the PPI's monthly increase. Diesel fuel prices alone soared 42%, while jet fuel prices climbed 30.7%. Consequently, goods prices increased 1.6%, but this was offset by unchanged services costs. Fed officials view services inflation, which excludes the effects of tariffs and war-related shocks, as a core metric. Portfolio management fees, which had contributed to higher producer prices earlier this year, rose 1% for the month and were up 10.8% compared to a year ago. Market reaction to the report was muted, with stock index futures pointing to a slightly higher open and U.S. Treasury yields largely unchanged. Although some March inflation indicators suggested a reacceleration of price pressures, Federal Reserve policymakers are likely to look past this volatility if core measures remain moderate and, equally importantly, a ceasefire involving Iran holds. Energy prices have retreated since the announcement of a ceasefire. The price of U.S. benchmark crude oil has fallen nearly 15% over the past week, though it remains up nearly 70% for the year. Fed officials have expressed some caution regarding the impact of the conflict but generally believe inflation will continue to slow throughout the year, gradually moving back toward the central bank's 2% target. Despite this, markets still anticipate the Fed will hold interest rates steady for the remainder of the year, with pricing suggesting roughly a one-in-four chance of a rate cut before December.