U.S. producer prices remained unchanged in February for the first time in seven months, while initial jobless claims declined slightly, signaling a stable economy. However, deep government spending cuts and escalating tariffs are raising recession fears.
Inflation Risks Amid Trade War
The Labor Department reported Thursday that the Producer Price Index (PPI) was flat last month following a 0.6% rise in January. Economists had forecast a 0.3% increase. Year-over-year, the PPI rose 3.2%, down from 3.7% in January.
Despite the cooling headline number, underlying inflation pressures remain. Goods prices rose 0.3%, largely due to a 53.6% surge in wholesale egg prices driven by a bird flu outbreak. Food prices jumped 1.7%, while energy prices fell 1.2%.
Companies may also be preemptively raising prices ahead of new tariffs. President Donald Trump has raised duties on Chinese goods to 20% and imposed a 25% tariff on imports from Canada and Mexico, with a temporary exemption for USMCA-compliant products.
Tariffs Escalate Global Tensions
The White House is facing backlash over its trade policies. Trump threatened a 200% tariff on European wine, cognac, and alcohol imports Thursday, prompting fears of a retaliatory response from the EU.
With tariffs set to impact consumer goods, analysts expect inflation to remain elevated. Stocks fell on Wall Street, while the dollar strengthened and Treasury yields declined.
Services Prices Decline
Service sector costs fell 0.2%, led by a 1.4% drop in machinery and vehicle wholesale margins. Prices for food, alcohol, and apparel also fell, but hospital inpatient costs surged 1.0%, and portfolio management fees rose 0.5%.
These mixed results suggest core inflation, measured by the Personal Consumption Expenditures (PCE) price index, likely increased 0.3% in February, with year-over-year growth forecast at 2.7%.
Federal Reserve Policy Outlook
With inflation pressures still present, the Federal Reserve is expected to hold interest rates steady at 4.25%-4.50% in its meeting next Wednesday. Financial markets anticipate rate cuts starting in June.
Labor Market Challenges
A separate Labor Department report showed initial jobless claims fell by 2,000 to 220,000 for the week ending March 8. However, deep federal spending cuts could impact employment.
Trump’s Department of Government Efficiency (DOGE), led by Elon Musk, has laid off thousands of federal employees. Unions are challenging the dismissals, and a federal judge has ordered six agencies, including Veterans Affairs, to reinstate workers.
“With the ongoing agency cuts and court battles, the exact number of federal employees going without pay is unclear,” said Andrew Stettner, a senior fellow at the Century Foundation.
Uncertainty Ahead
Federal spending cuts have also affected contractors and nonprofits, raising jobless claims in Washington D.C., Maryland, and Virginia. Despite a decline of 27,000 in continuing claims, analysts warn that economic uncertainty is growing.
“The radical cuts in spending and personnel could halt economic progress in the coming months,” said Christopher Rupkey, chief economist at FWDBONDS.
