Inflation concerns continue to loom large as the surge in services and core goods inflation threatens overall inflation. The latest data from the Bureau of Labor Statistics reveals a sudden jump in the Producer Price Index (PPI) for final demand services, indicating a significant increase in inflationary pressures. This comes after months of relatively benign readings, with only one higher reading recorded since early 2022.
The surge in services inflation is particularly concerning as it accounts for a substantial portion of the overall PPI. In fact, final demand services make up 62.3% of the index, and the recent spike was primarily driven by a significant increase in the price of finished consumer services, excluding trade, transportation, and warehousing. This component alone accounts for 32.9% of the PPI and saw a month-to-month increase of 1.0% or an annualized increase of 12.7%.
While it is important to exercise caution when interpreting month-to-month inflation data due to its volatility, the recent surge in services inflation aligns with trends observed in the Consumer Price Index (CPI) for services over the past few months. This suggests that the warning lights are blinking, indicating a potential acceleration in inflationary pressures.
On the consumer side of the economy, prices for services have been steadily increasing for months and experienced a spike in January. This surge in services inflation is now impacting producers as well, who are likely to pass on these increased costs to consumers.
In addition to services inflation, there has also been a sudden reheating of finished core goods inflation. The PPI for finished goods, excluding food and energy, saw a spike in January after months of relatively benign increases. This breakout from the previous seven months’ range is disconcerting as it challenges the hopes that goods deflation would continue to hold down overall inflation measures.
The surge in services PPI and finished goods PPI has fueled an increase in the core PPI, which covers goods and services excluding food and energy. The core PPI for final demand jumped by 0.50% seasonally adjusted or 6.2% annualized, highlighting the growing inflationary pressures in the economy.
Overall, the surge in services inflation and the potential reheating of core goods inflation are concerning developments. Services account for over 60% of both producer and consumer inflation baskets, making the issue particularly grave. This aligns with what has already been observed in the CPI, where core services inflation jumped by 8.2% annualized in January from December.
As inflation concerns persist, it is crucial to closely monitor these developments and their potential impact on the overall economy. The recent surge in services and core goods inflation raises questions about the sustainability of the disinflation momentum observed in consumer prices last year. With inflationary pressures on the rise, policymakers and market participants will need to carefully navigate these challenges to ensure economic stability and mitigate the impact on consumers.