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US producer prices saw the highest gains in over a year last month, driven by increases in services like healthcare and hotel accommodation. The producer price index (PPI) outperformed yearly expectations of 1.6% gain, rising 2.1% according to the Labor Department report released on Wednesday.

Key Takeaways

• PPI came in at 2.1% in the 12 months through January vs. 1.6% expected and 1.3% the month before.
• Core PPI rose 0.4% on a monthly basis vs. 0.2% the month before, and 1.5% annually in January and December.
• Increased costs in hotel accommodation and healthcare services drove up costs last month.

Wholesale energy prices dropped 0.7% last month following a 1.5% increase in December. This was largely due to a 1.5% decrease in the cost of gasoline which rose 4.2% in December. The cost of services rose 0.7% last month, the most since October 2018, following no change the month before. Healthcare services rose 0.6%, and portfolio management fees rose 2.3% after rising 1.9% in December.

The cost of foods rose 0.1% last month and 0.3% the month before, with wholesale goods gaining 0.2% in January and falling 0.3% in December. Core goods prices rose 0.3% in January, beating the 0.2% gain in December. Hotel accommodation and machinery and vehicle wholesaling also saw increased costs.

Core Figures

The PPI for final demand rose 0.5% last month, the largest gain since October 2018 after a 0.2% increase in December. Excluding the volatile components of food, energy, and trade services components, producer prices rose 0.4% last month, the most since April. This core PPI metric rose 1.5% annually last month and the month before.

A recently reported increase in core consumer prices may indicate increased inflationary pressure, bringing the Fed closer to its 2% goal. Core PCE rose 0.2% last month, with 1.7% expected as the annual figure. This will be released on Friday.  The central bank has indicated that it will not alter interest rates in the coming year.

Producer prices for final demand goods and services jumped 0.5% in Jan., the fastest monthly gain since Oct. 2018. At the same time, producer prices for final demand goods edged up 0.1% in Jan., pulled lower by a 0.7% drop in energy costs for the month. Food prices were up 0.2%. pic.twitter.com/OCvyBnCedE

— Chad Moutray (@chadmoutray) February 19, 2020

Market Reaction

Gold prices have held firm following the producer prices data along with reports of greatly increased activity in the housing sector. Spot gold last traded at $1,606.76/oz, up 0.42% with a high of $1,610.97/oz and a low of $1,599.70/oz. With much of China’s population now under quarantine, concerns around the impact of the COVID-19 coronavirus are mounting.

The outbreak has already affected local commerce as well as hitting the bottom lines of companies like Apple which have supply chain connections to China, and this is creating strong risk aversion appetite in the financial markets, increasing the use case for gold as a safe haven.