US producer inflation rises below expectations in March, but war fires up energy prices

By Lucia Mutikani

WASHINGTON, April 14 (Reuters) - U.S. producer prices increased less than expected in March, but that did not change economists' expectations that the Federal Reserve would probably not cut interest rates in the near term amid rising energy costs because of the war with Iran.

The report from the Labor Department on Tuesday also suggested the impact on producer inflation from import tariffs was waning. Nonetheless, economists still believed the Personal Consumption Expenditures price indexes tracked by the U.S. central bank for its 2% inflation target were firmer in March.

"The only good thing is that producer price inflation was perhaps not as bad as feared given March is the first full month since the Iran war began," said Christopher Rupkey, chief economist at FWDBONDS. "Producers are still reporting above-normal price increases which will put upward pressure on inflation the consumer is already seeing."

The Producer Price Index for final demand rose 0.5% last month after a downwardly revised 0.5% gain in February, the Labor Department's Bureau of Labor Statistics said. Economists polled by Reuters had forecast the PPI accelerating 1.1% after a previously reported 0.7% gain in February.

In the 12 months through March, the PPI advanced 4.0%, the largest gain since February 2023, after increasing 3.4% in February.

A 1.6% increase in the cost of goods accounted for the rise in the monthly PPI. Goods prices had risen 1.0% in February. They were last month boosted by a 15.7% jump in gasoline prices. The cost of jet fuel soared 30.7% while natural gas liquids increased 14.4%. Overall energy prices increased 8.5% after rising 2.1% in February.

Further increases are likely as oil prices shot up on Monday to more than $100 a barrel after the U.S. military said it would blockade ships leaving Iran's ports. Oil prices have jumped more than 35% since the U.S.-Israeli war with Iran started at the end of February.

Wholesale food prices fell 0.3%, weighed down by decreases in fresh and dry vegetables, eggs and processed chickens. But grain prices jumped 7.6% and the cost of beef and veal rose 2.2%. Excluding the volatile food and energy components, producer goods prices gained 0.2% after rising 0.3% in February.

Stocks on Wall Street were higher. The dollar slipped against a basket of currencies. U.S. Treasury yields rose.

TARIFF PASS-THROUGH MAY BE EASING

The jump in overall goods prices was blunted by services, which were unchanged in March. Services rose 0.3% in February.

A 1.3% increase in the price of transportation and warehousing services was offset by a 0.3% decline in margins for trade services. These measure changes in margins received by wholesalers and retailers.

Some economists said the decline in margins suggested that the pass-through from tariffs was nearly over.

"All this may be a sign that any tariff-related effects on producer prices are already starting to ease," said Stephen Brown, chief North America economist at Capital Economics.

But wholesale airline fares rebounded 2.8% and could rise further amid the jet fuel price surge. They fell 0.6% in February. Portfolio management fees gained 1.0% for a second straight month, despite a recent stock market selloff.

Health and medical insurance costs increased 0.5%. There were increases in physician and hospital outpatient care. Dental and hospital inpatient care prices rose marginally.

Wholesale prices for hotel and motel rooms slipped 0.1% after rebounding 5.4% in February. The cost of legal services increased 0.3% in March after rising 0.9%.

Airline fares, portfolio management fees and hotel and motel rooms are among the components that go into the calculation of PCE inflation. The BLS reported last week that the Consumer Price Index logged its biggest monthly gain in nearly four years in March amid a record jump in the cost of gasoline and diesel.

The Bureau of Economic Analysis, which compiles the PCE inflation measures, in January used the PPI legal services rather than the gauge in the CPI, catching economists off guard.

With PPI and CPI data in hand, economists estimated that PCE inflation jumped 0.7% in March after climbing 0.4% in February. That would translate into a year-on-year increase of 3.5% and follow a 2.8% rise in February.

"The BEA has declined to provide us with guidance on which approach they will take, but because they chose PPI in January, when CPI had an unusually large spike, we assume they will again use PPI in March, when CPI had a fairly large decline," said Abiel Reinhart, an economist at JPMorgan.

Core PCE inflation was forecast to have increased 0.3% in March after rising 0.4% for two consecutive months. In the 12 months through March, core PCE inflation was estimated to have advanced 3.2%, which would be the largest gain in two years. It rose 3.0% year-on-year in February.

Financial markets are pricing in roughly a one-in-three chance of a rate cut this year. Minutes of the central bank's March 17-18 policy meeting, which were published last week, showed a growing group of policymakers last month felt that rate hikes might be needed. The Fed left its benchmark overnight interest rate in the 3.50%-3.75% range.

"It will be some while before the majority on the FOMC see evidence of subsiding inflation pressures," said John Ryding, chief economic advisor at Brean Capital.

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci)