The Producer Price Index (PPI), which measures inflation on the wholesale level, rose 0.3% in January, coming in above the expected 0.1% rise. On an annual basis, PPI fell from 1% to 0.9% and while this is a very low number, it was expected to fall to 0.6%. Core PPI, which strips out volatile food and energy prices, was much hotter than expected with a 0.5% rise. The year-over-year reading rose from 1.8% to 2%.
What’s the bottom line? Despite the upside surprise in the data, wholesale inflation is still trending lower. January’s 0.9% year-over-year reading is a sharp drop from 2022’s 11.7% peak.
Remember, the Fed began aggressively hiking the Fed Funds Rate (the overnight borrowing rate for banks) in March 2022 to try to slow the economy and curb runaway inflation. Following eleven hikes in this cycle, the Fed has pressed pause at their last four meetings as signs of cooling inflation grew.
The Fed is expected to begin cutting the Fed Funds Rate later this year, given the progress made to tame inflation. We will have to see if these hotter than expected readings for January ultimately impact the timing of their plans.