U.S. Producer Prices Surprise: Flat PPI in February

While markets braced for another uptick in wholesale costs, U.S. producer prices threw everyone a curveball in February by staying completely flat. After January’s hefty 0.6% increase, economists were betting on another 0.3% rise. Wrong. The Producer Price Index (PPI) had other plans, delivering a reality check to market predictions.

February’s flat PPI stunned markets and economists alike, defying expectations of continued wholesale price increases after January’s sharp rise.

Even more surprising, core PPI – which strips out those pesky food and energy prices – actually dropped 0.1%. This marked the first negative reading since July. According to Justin Begley at Moody’s Analytics, the data shows clear inflation moderation. Who saw that coming? Not the economists, who once again were caught off guard expecting a 0.3% increase. Sometimes the experts miss the mark. Badly.

The details paint an interesting picture. Services prices dipped 0.2%, while goods prices inched up 0.3%. Year-over-year producer prices showed steady decline to 3.2%. And talk about extremes – chicken egg prices shot up an eye-watering 53.6% (thanks, avian flu), while gasoline prices took a invigorating 4.7% dive. Core prices excluding trade services saw a modest 0.2% gain. Machinery and vehicle wholesaling margins also stumbled, falling 1.4%. The January PPI figure saw an upward revision to 0.6%.

Looking at the bigger picture, yearly wholesale inflation is running at 3.2%, with core PPI at 3.4%. Sure, that’s still above the Federal Reserve’s magical 2% target, but things are cooling down faster than anyone expected. The Fed’s probably breathing a little easier now.

Speaking of the Fed, markets are pretty much betting the house on rate cuts starting in June, with two more expected before we ring in 2024. But here’s where things get interesting – trade policies might throw a wrench in the works. Those Trump-era tariffs are still kicking around: 25% on foreign steel and aluminum, 20% on Chinese imports, and threats of more to come.

Consumer prices aren’t sitting still either. The Consumer Price Index (CPI) nudged up 0.2% in February, with overall inflation at 2.8%. Not terrible, but not great either. The difference between PPI and CPI matters because wholesale prices often signal where consumer prices are headed.

The market’s reaction? Stock futures trimmed their losses after the PPI report dropped, though Treasury yields stayed stubbornly high. Retailers are getting nervous about consumer spending, and some economists are warning about tariffs potentially driving up food prices down the road.

But for now, at least, inflation pressures seem to be easing more than anyone expected. Sometimes the best surprises come in flat packages.