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Reports show US producer prices rising, but inflation spike not expected

A trio of reports has added to the evidence that inflation will firm in the coming months, but analysts cautioned against reading too much into the data and said there are few indications that there would be a dramatic increase in inflation.

The issue has gotten outsized attention in the past two weeks, with some fearing that a jump in inflation would force the Federal Reserve to take a faster path on interest rate hikes than anticipated. A Feb. 2 report showing faster wage growth helped spark a sell-off in the equities markets that erased the major U.S. stock indexes' gains for the year.

The stock market has slightly recovered from that sell-off despite two consecutive days of reports last week showing more inflation pressures. As of Feb. 16, the S&P 500 is up 2.19% year-to-date. Analysts say that may be a reflection that investors have priced in modest gains in inflation and that their fears over the Fed taking quicker-than-expected action may be subsiding.

"We should expect to see inflation rising. We should expect to see some wage gains," said John Velis, senior multi-asset strategist at State Street Global Markets. "And if they're contained and they're modest and basically a return to trend, which we've been missing out on for a while, that's all right."

The latest signs of stronger inflation came Feb. 15, as the producer price index showed a 0.4% increase in January, according to the Bureau of Labor Statistics. The pickup was in line with analysts' expectations and contrasted with December 2017's figure staying unchanged.

Two separate surveys from the New York Fed and Philadelphia Fed also showed Feb. 15 that manufacturers reported higher price inputs to make their products.

Analysts caution higher producer prices do not always translate into higher inflation figures, though those also showed an increase last week. The consumer price index rose 2.1% year over year in January, while the core CPI, which excludes food and energy, grew 1.8%. Both of those were above consensus expectations.

Still, some note, the increases were not too substantial, and a closer look at the numbers shows they may have been influenced by temporary factors.

The overall CPI figures were partly driven by a 3% increase in energy costs that should subside next month, said Gregory Daco, the chief U.S. economist for Oxford Economics.

Daco said there was also a "pretty sharp rise" in apparel prices, which grew 1.7% and added 0.1 percentage point to the core CPI figures. The increase, he said, may be due to an issue with adjusting for seasonality coming out of the holidays.

Brian Rehling, of the Wells Fargo Investment Institute, cautioned that the reports only show one month of data, adding that the figures so far do not indicate an "acceleration in inflation is imminent."

"I think people are concerned about the data, but the data does not suggest yet that we're looking at runaway inflation or any kind of significant acceleration in inflation," he said.