(February 16 – 12:00 ET) – The latest U.S. Producer Price Index, released this morning, may serve to slow the cycle of bank rate cuts, Canadian economists are saying.

Economists were expecting a 0.2% rise in the PPI this morning. Instead, a monstrous 1.1% gain was reported. “For markets weaned on the low inflation diet of recent years, January’s PPI report was a shocker by any stretch. The headline’s 1.1% rise was triple the expectation, and the largest gain in the last decade,” say the analysts at CIBC World Markets.

While much of the gain can be blamed on energy prices, the core rate was up 0.7%, far ahead of the 0.1% consensus estimate.

No matter how they slice it, economists can’t escape the conclusion that they blew this call and may have to re-thonk the economic slowdown theory. Economists at BMO Nesbitt Burns say that this report “was riddled with one-time hits. Still, it is a major shot across the bow of the ‘inflation is set to tumble’ story. If next Wednesday’s CPI report echoes this strength, the pace of Fed easing may slow until fresh signs of economic slowing emerge.”

“While today’s PPI report may sow some seeds of concern, it is hard to see inflation getting a strong foothold,” CIBC concludes. “In spite of today’s readings, the Fed is likely to remain focused on ensuring that the current slowdown in the economy does not turn into a full-blown recession. That means rates are likely to fall further assuming next week’s CPI paints a somewhat more benign picture of inflation and the February and March data show renewed weakness after the economy’s weather-related bounce in January.”
-IE Staff