What Today’s Wholesale Prices Report Says About Inflation

Economists’ hopes that price increases would slow down were rocked when April’s wholesale inflation report showed costs took an unexpected leap, setting the stage for another disappointing Consumer Price Index (CPI) report and continued higher interest rates.

Tuesday’s release of the Producer Price Index (PPI) showed prices jumped for wholesalers in April by 0.5% compared with last month, higher than the 0.3% that economists were looking to see. Wholesale prices are important to inflation, as increased costs are often passed on to consumers.

Now, economists are bracing for another high inflation number on Wednesday when the CPI is released, which shows the price changes for people who buy products in stores or online, pay their mortgage or rent, and spend on a host of other everyday products and services.

“Inflation pressures in the U.S. economy are still substantial and the momentum that built up over the last few years is still rolling along,” wrote Comerica Bank Chief Economist Bill Adams.

Federal Reserve Still Not Seeing Cooling Inflation 

Another high inflation report would be a problem for Chair Jerome Powell and his fellow Federal Reserve officials, who had been expecting prices to cool after making progress on inflation in 2023.

If inflation remains hot, it could be another signal for Fed officials to keep interest rates at their current level of 5.25% to 5.5%, the highest they have been in more than two decades. 

“The probability for interest rate cuts have been slowed as the Fed’s timetable to initiate a rate easing cycle is thwarted by stubbornly higher prices,” wrote Quincy Krosby, chief global strategist at LPL Financial. “Tomorrow’s CPI report becomes even more important for any signs suggesting that the path toward price stability has gained momentum.”

Many economists saw the underwhelming PPI data as another indication that interest rate cuts are becoming less likely in 2024. The Federal Reserve previously had forecast that it would cut rates three times this year. Since then, Fed officials have downplayed interest rate cuts, with many saying they needed to see more progress on inflation. 

“An upside surprise to producer prices in April won’t give the Fed greater confidence that inflation is decelerating after a hot start to 2024,” wrote Matthew Martin, U.S. economist at Oxford Economics.