Wholesale inflation jumps to highest level in three years - but the news is not all bad

By Jeffry Bartash

The producer-price index is up 4% in the past year, and there are more increases to come

Inflation began rising again at the wholesale level last year. Now price increases are making their way into consumer goods such as clothes.

U.S. inflation at the wholesale level rose to a three-year high in March due to surging oil prices tied to the Iran war, but aside from energy, the increases in the cost of other goods and services were surprisingly tame.

The producer-price index jumped 0.5% last month, the government said Tuesday, to mark the fourth straight big increase. Economists polled by the Wall Street Journal had forecast a sharper 1.1% advance.

The rise in wholesale prices in the last 12 months climbed to 4%, up from 3.4% in the prior month. That's the highest level in three years.

Price increases at the wholesale level raise the costs consumers pay for goods and services to varying degrees. The consumer-price index in March registered its biggest increase since mid-2022.

Yet wholesale prices excluding food and energy - known as core prices - rose a more mild 0.2% in March. It was the smallest increase this year and half what investors expected.

"March's inflation could have been much worse," said David Russell, global head of market strategy at TradeStation.

Still, even if the Iran conflict ends soon, the rate of U.S. inflation is bound to continue to rise in the next few months, remaining well above the Federal Reserve's 2% target.

The Fed won't have much leeway - if any - to cut interest rates and reduce borrowing costs on mortgages and other loans if inflation is heading higher.

Key details:

The 12-month increase in core prices inched up to 3.6% from 3.5%. The core rate strips out volatile food, energy and trade-related costs and gives a more accurate view of inflation trends at the wholesale level.

Wholesale-goods costs leaped 1.6%, almost entirely because of higher oil prices.

Service prices, a big source of inflation in the past few years, were unchanged in March, in a welcome sign. They had risen seven months in a row.

Inflation appeared to be somewhat subdued in earlier stages of business production.

The cost of partly finished goods shot up 2.6%, with energy accounting for three-quarters of the increase. Yet the cost of raw materials dropped 2.6% last month.

Big picture: The March report on wholesale prices wasn't as bad as Wall Street had expected. Yet with oil prices still 50% higher than before the Iran war, the danger of higher inflation is far from over.

More expensive oil will add additional stress to the U.S. economy and discourage the Federal Reserve from cutting interest rates.

Looking ahead: "Overall, this report supports the view that inflation remains under control," said Eugenio Aleman, chief economist at Raymond James.

"If geopolitical tensions, particularly involving Iran, prove short-lived and energy prices ease in the coming months, it would reinforce the case for the Federal Reserve to implement one rate cut later this year," he added.

Market reaction: The Dow Jones Industrial Average DJIA and S&P 500 SPX rose in Tuesday trading on hopes for renewed peace talks between the U.S. and Iran.

-Jeffry Bartash

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