Services and Wages Playing Their Role in Current Inflationary Pressures

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When the U.S. Department of Labor released its February measurement of the Producer Price Index (PPI), it showed that producer prices tended to rise more than consumer prices. Unfortunately for the inflation hawks, there seems to be a continued underlying wage-inflation metric driving the gains.

The monthly PPI gain of 0.2% translated into a 2.8% gain from last February’s reading. The core reading, excluding food, energy and trade services costs, was up 2.7% from a year ago. This was the largest gain going back to summer of 2014.

The prices paid for services was the big driver here, with a 2.8% gain from a year ago. Does that sound familiar when considering the most recent wage gains of 2.6% and 2.9% from the first two months of this year? This was also the strongest gain in almost eight years.

Prices for final demand goods were down 0.1% in February.

As a reminder, the Federal Reserve’s official inflation target is 2.0%, though that had been a range of 2.0% to 2.5% in prior years. That target has been elusive until the latest economic reports started showing hotter inflation.

The Labor Department suggested that the gains were actually tied to travel accommodation services, followed by other sectors. The report said:

A major factor in the February advance in prices for final demand services was the index for traveler accommodation services, which climbed 3.7 percent. The indexes for automotive fuels and lubricants retailing, food retailing, bundled wired telecommunications access services, hospital inpatient care, and airline passenger services also moved higher. In contrast, margins for machinery, equipment, parts, and supplies wholesaling fell 1.4 percent. The indexes for apparel, jewelry, footwear, and accessories retailing and for cable and satellite subscriber services also decreased.

Other large gains were shown as follows:

  • Leading the February decrease in the index for final demand goods, prices for fresh and dry vegetables dropped 27.1 percent.
  • Prices for primary basic organic chemicals rose 7.2 percent.
  • For the 12 months ended in February, the index for unprocessed goods for intermediate demand climbed 5.6 percent.
  • Leading the February advance in the index for unprocessed goods for intermediate demand, natural gas prices jumped 23.5 percent.
  • Prices for processed goods for intermediate demand was the index for primary basic organic chemicals rose 7.2 percent.
  • Three-quarters of the February rise in unprocessed goods for intermediate demand can be attributed to the index for unprocessed energy materials, which climbed 5.4 percent.