U.S. wholesale prices surge in January, but it’s probably a false alarm

The numbers: The wholesale cost of U.S. goods and services posted the sharpest increase in January in 15 months, but most of the uptick appeared to reflect temporary price swings instead of an underlying increase in inflation.

The producer price index jumped 0.5% last month, marking the largest gain since the fall of 2018. Economists polled by MarketWatch had predicted a 0.2% advance.

The increase in wholesale inflation over the past 12 months also shot up to 2.1% from 1.3%, though it’s still well below the most recent peak of 3.4% a year and a half ago.

What happened: About 90% of the increase in wholesale costs stemmed from a spike in trade margins, an oft-erratic category each month that has little bearing on what companies actually pay in the longer run.

Trade margins leaped 0.7% in January after basically no change in the last five months of 2019.

The cost of goods, on the other hand, rose a scant 0.1%. Food costs rose slightly and energy prices fell.

Another measure of wholesale costs that’s viewed as a more accurate gauge of price trends rose 0.4% last month. Yet the increase in the so-called core PPI was unchanged over the past year at 1.5%.

The core rate strips out food, energy and retail trade margins since those costs have shown a tendency to swing sharply from month to month.

Another sign that the spike in wholesale prices in January is unlikely to last were the declines in the cost of both partly processed and raw materials last month. These prices have actually declined in the past 12 year.

Big picture: Inflation has settled around 2% in the past year and isn’t moving much.

A closely followed measure of consumer costs has climbed 2.5%, but the Federal Reserve’s preferred PCE inflation gauge has only risen at a 1.6% yearly pace. The PPI sits in the middle of the spectrum and suggests little inflationary pressure in the pipeline.

The low rate of inflation means the Federal Reserve is unlikely to raise interest rates this year, giving the economy a bit of a boost. The housing market has especially benefited from tumbling mortgage rates.

Read: Feeling good: Consumer sentiment climbs back near 15-year high

Market reaction: The Dow Jones Industrial Average DJIA, -0.56% and S&P 500 SPX, -0.29% were set to open lower in Wednesday trades. Both indexes have backed off record highs amid lingering worries over the spread of COVID-19.

The 10-year Treasury yield TMUBMUSD10Y, +1.09% slipped to 1.56%.

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