PPI Inflation Surges as Fed Signals Higher-for-Longer Rates

This week’s economic data includes: (1) Producer Price Index (PPI) Index for February, (2) the March Federal Open Market Committee (FOMC) meeting, and (3) weekly initial jobless and continuing claims.

KEY SUMMARY:

Wholesale prices surged more than expected in February, driven by sharp increases in food, energy, and services, with core and super‑core measures also coming in hot—signaling persistent underlying inflation pressures even before higher oil prices from the Middle East conflict took hold.

Wholesale prices rose a stronger‑than‑expected 0.7% month over month in February, following a 0.5% increase in January and marking the largest monthly gain since July. The increase was driven by higher prices for goods and services, led by food, energy, and services excluding trade, transportation, and warehousing, all of which occurred before the escalation of the Middle East conflict that later pushed oil prices higher. On a year‑over‑year basis, producer prices rose 3.4%, accelerating from January and exceeding market expectations.

Goods prices surged 1.1% in February, reflecting sharp increases in food and energy, while core goods rose a more moderate 0.3%. Service prices also increased for a third consecutive month, led by accommodations, financial services, and trade‑related margins. Core PPI and “super core” PPI both rose 0.5% month over month, coming in well above expectations and signaling continued underlying inflation pressures. While PPI components that feed into core PCE increased in February, their overall contribution was smaller than in January, with hospital and portfolio management costs rising, offset by softer physician care, home health care, and airfare prices.

The Fed held rates steady at 3.50%–3.75%, citing solid growth but elevated inflation and heightened uncertainty from the Middle East conflict, while signaling a higher‑for‑longer stance with fewer expected rate cuts despite projecting modest easing in 2026–2027.

The FOMC voted 11–1 to keep the federal funds rate unchanged at 3.50%–3.75%, with Governor Stephen Miran dissenting in favor of a 25‑basis‑point cut. The Fed said economic activity continues to expand at a solid pace, inflation remains somewhat elevated, and job gains have been modest, while emphasizing that uncertainty around the outlook remains high due to the ongoing war in the Middle East. Chair Powell noted that higher energy prices are likely to lift headline inflation in the near term, although the scope and duration of the impact remain unclear, and reiterated his concerns about persistently low job creation.

The Fed’s quarterly economic projections showed higher forecasts for inflation and economic growth, steady unemployment, and one rate cut projected in each of 2026 and 2027. Powell said many policymakers now expect fewer rate cuts than earlier this year, though the median rate path was unchanged and most do not see a rate hike as the next move. He highlighted AI‑driven productivity gains as a support to growth and stressed that the current energy‑price shock tied to the war with Iran differs from 1970s‑style stagflation, with inflation still close to target and unemployment low, while higher 2026 inflation projections reflect both the oil shock and slower disinflation from tariffs.

Weekly initial jobless claims fell to a multi‑month low, signaling limited layoffs and a stable, low‑hiring, low‑firing labor market, while continuing claims edged higher but remained below year‑ago levels, suggesting modestly tougher job‑finding conditions for the unemployed.

Initial jobless claims fell to 205,000 for the week ending March 14—well below expectations and the lowest level since early January—signaling a continued low‑hiring, low‑firing labor market alongside modest job growth and limited layoffs thus far in 2026. While continuing claims edged higher to 1.857 million, they remain below year‑ago levels, and the four‑week average declined slightly, suggesting unemployed workers are experiencing somewhat greater difficulty finding new jobs but overall labor market conditions remain stable.

Markets sold off for a fourth straight week as surging oil prices tied to the Middle East conflict fueled inflation fears, pushed Treasury yields to multi‑month highs, widened the Brent‑WTI spread, and led investors to further scale back expectations for Fed rate cuts.

Equity markets declined for a fourth consecutive week as rising inflation concerns—driven by surging oil prices tied to the Middle East conflict—and fading expectations for Federal Reserve rate cuts weighed on investor sentiment. All major indexes posted weekly and year‑to‑date losses, with the Nasdaq, S&P 500, Dow Jones Industrial Average, and Russell 2000 all ending the week lower.

Oil markets remained volatile but moved higher, reflecting continued disruptions from the closure of the Strait of Hormuz and ongoing attacks on regional energy infrastructure. Brent crude surged nearly 9% to its highest level since mid‑2022, while West Texas Intermediate (WTI) crude was little changed but still near multi‑year highs. Persistent fears of prolonged global supply disruptions significantly widened the Brent–WTI spread and pushed U.S. gasoline prices sharply higher since the conflict began.

Treasury yields climbed across the curve, reaching their highest levels since July 2025, as inflation risks and expectations for a higher‑for‑longer Fed policy stance intensified. Short‑term yields rose faster than long‑term yields, producing a bear‑flattening move, while markets further reduced expectations for rate cuts—now pricing no cuts in 2026 and only a single cut in late 2027.

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DETAILED ANALYSIS:

PPI – February Update: 

The Bureau of Labor Statistics (BLS) reported that the Producer Price Index (PPI) rose 0.7% month over month in February, following a 0.5% increase in January. The gain—driven by higher goods and service prices, particularly food (19% contribution), energy (17%), and services excluding trade, transportation, and warehousing (34%)—significantly exceeded market expectations for a 0.3% increase and marked the strongest monthly reading since July. Notably, this increase occurred prior to the escalation of the war in the Middle East, which has since pushed oil prices higher. On a year‑over‑year basis, PPI rose 3.4%, up from 2.9% in January and above the consensus forecast of 3.0%.

Goods Prices

Goods prices, including food and energy, increased sharply by 1.1% month over month in February, reversing a 0.2% decline in January and representing the largest monthly gain since August 2023. The increase was driven primarily by food prices, which rose 2.4%, and energy prices, which climbed 2.3%. Food price gains were led by fresh fruits and melons (10.3%), fresh and dry vegetables (48.9%), and chicken eggs (93.6%). Higher energy prices reflected increases in diesel fuel (13.9%) and liquefied natural gas (6.6%).

In contrast, core goods prices—excluding food and energy—rose a more moderate 0.3% month over month in February, following a 0.7% increase in January. Notable gains were recorded in electronic components and accessories (10.3%), iron and steel scrap (5.0%), and cigarettes (2.9%).

Services Prices: 

Service prices increased 0.5% month over month in February, slowing from a 0.8% increase in January but marking the third consecutive monthly gain. The increase was driven primarily by a 0.6% rise in services excluding trade, transportation, and warehousing. Trade services and transportation and warehousing prices rose 0.4% and 0.5%, respectively.

Within services excluding trade, transportation, and warehousing, the largest increases were seen in traveler accommodation services (5.7%), securities brokerage, dealing, investment advice, and related services (4.2%), and cable and satellite subscriber services (2.8%).

Trade services, which measure changes in margins received by wholesalers and retailers, were led by higher margins in fuels and lubricants retailing (11.4%), sporting goods (5.7%), and food and alcohol wholesaling (4.6%). Transportation and warehousing price gains were primarily driven by truck freight transportation, which rose 1.2%.

Core and Super Core PPI

Excluding food and energy, core PPI rose 0.5% month over month in February, down from 0.8% in January but well above expectations for a 0.3% increase. On a year‑over‑year basis, core PPI increased 3.9%, down from a revised 3.5% in January but exceeding the expected 3.7%.

The “super core” PPI—which excludes food, energy, and trade services—rose 0.5% month over month in February, up from 0.4% in January and above market expectations of 0.3%. On a year‑over‑year basis, super core PPI increased 3.5%, up from 3.4% in January and slightly above expectations.

Markets continue to closely monitor the seven PPI components that feed into the core PCE Price Index, the Federal Reserve’s preferred inflation gauge. While these components increased overall in February, their contribution is expected to be smaller than in January. Hospital care costs accelerated, and portfolio management costs continued to rise, while physician care and home health care costs remained subdued and airfares declined.

March 17-18 FOMC Meeting:

The FOMC voted 11–1 to leave the benchmark federal funds rate unchanged in a target range of 3.50%–3.75%. Governor Stephen Miran dissented, favoring a 25‑basis‑point rate cut. In its post‑meeting statement, the Fed noted that economic activity continues to expand at a solid pace, inflation remains somewhat elevated, and job gains have been modest, with little change in the unemployment rate. The Committee also emphasized that uncertainty around the economic outlook remains elevated due to the ongoing war in the Middle East.

During the press conference, Chair Powell stated that if his successor is not confirmed before his term as chair ends in May, he would serve as interim chair. He also noted that he has no intention of resigning from the Board of Governors—which extends through January 2028—until the Department of Justice investigation into a building renovation project is fully resolved. Powell added that higher energy prices are expected to push headline inflation higher in the near term, though it is too early to assess the magnitude or duration of the economic impact. He also expressed concern about the persistently low level of job creation.

The Fed released its quarterly Summary of Economic Projections (SEP), which reflected higher inflation and economic growth expectations, steady unemployment, and one rate cut penciled in for each of 2026 and 2027. Chair Powell noted that a meaningful number of the 19 policymakers now project fewer rate cuts than they did at the December meeting, although the median federal funds rate projection was unchanged. He emphasized that the vast majority of policymakers do not view a rate hike as their base case for the next policy move. Powell also highlighted that AI‑driven productivity gains are contributing to stronger growth projections and stressed that the current environment—marked by an energy price shock tied to the war with Iran—differs materially from the stagflation of the 1970s, given inflation remains only about one percentage point above target and unemployment is low. He added that the higher inflation projections for 2026 reflect both the oil shock and slower progress on inflation due to tariffs.

Key takeaways for the SEP:

1. Federal Funds Rate Projections (Dot Plot)
   • 2026: 3.4% (unchanged)
   • 2027: 3.1% (unchanged)
   • 2028: 3.1% (unchanged)
   • Long-run neutral rate: 3.1% (up from 3.0%)
2. GDP Growth

• 2026: 2.4% (up from 2.3%)
• 2027: 2.3% (up from 2.0%)
• 2028: 2.1% (up from 1.9%)
• Long-run growth rate: 2.0% (up from 1.8%)

3. Unemployment Rate

• 2026: 4.4% (unchanged)
• 2027: 4.3% (down from 4.2%)
• 2028: 4.2% (unchanged)
• Long-run estimate: 4.2% (unchanged)

4. Inflation (Headline PCE)

• 2026: 2.7% (up from 2.4%)
• 2027: 2.2% (up from 2.1%)
• 2028: 2.0% (unchanged)
• Long-run target: 2.0% (unchanged)

5. Inflation (Core PCE)

• 2026: 2.7% (up from 2.5%)
• 2027: 2.2% (up from 2.1%)
• 2028: 2.0% (unchanged)
• Long-run estimate: not collected

Jobless Claims – Week Ending March 14:

The Labor Department reported that initial jobless claims declined by 8,000 to 205,000 for the week ending March 14, down from 213,000 the prior week, below market expectations of 215,000, and the lowest level since early January. Claims also remained well below the 225,000 level recorded during the same week last year. The four‑week moving average fell by 750 to 210,750 from 211,500, signaling continued limited layoffs. Together with the 34,000 net new jobs created in the first two months of 2026, initial claims continue to reinforce a low‑hiring, low‑firing labor market.

Continuing claims—which measure the number of individuals receiving unemployment benefits—increased by 10,000 to 1.857 million for the week ending March 7, up from a revised 1.847 million the prior week and slightly above market expectations of 1.852 million. However, claims remained below the 1.876 million level recorded during the same week last year. Meanwhile, the four‑week moving average of continuing claims edged down to 1.851 million from 1.853 million, suggesting unemployed workers continue to face modestly greater difficulty finding new jobs.

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MARKET ANALYSIS:

Equity Market Weekly Recap

Equity markets declined for a fourth consecutive week, pressured by rising inflation concerns tied to surging oil prices amid the Middle East conflict and diminishing expectations for Federal Reserve rate cuts.

Weekly and Year-To-Date (YTD) Performance Highlights:

• Nasdaq: -2.07% (weekly) & -6.86% (YTD), closing at 21,648
• S&P 500: -1.90% (weekly) & -4.95% (YTD), ending at 6,506
• Dow Jones Industrial Average: -2.11% (weekly) & -5.17% (YTD), closing at 45,577
• Russell 2000: -1.68% (weekly) & -1.75% (YTD), ending at 2,438

Oil Market Weekly Recap

For the week ending March 20, 2026, crude oil prices remained volatile but trended higher, driven by the ongoing closure of the Strait of Hormuz and continued Iranian attacks on regional energy infrastructure. Brent crude, the global benchmark, surged $9.06 (8.8%), rising from $103.13 to $122.19 per barrel, its highest level since July 2022.

By contrast, West Texas Intermediate (WTI) crude, the U.S. benchmark, was little changed on the week, settling at $98.32 per barrel, down slightly from $98.71, but still marking its highest close since 2022.

Persistent concerns over prolonged global supply disruptions have significantly widened the Brent–WTI spread to nearly $14, compared with a pre‑war range of $4–$5, highlighting greater risk to international supply relative to U.S. production. Reflecting higher energy costs, U.S. gasoline prices have jumped 32%, or 96 cents per gallon, rising from $2.98 to $3.94 since the Middle East conflict began in late February 2026.

Treasury Market Update

Treasury yields moved higher again across nearly all maturities this week, with the largest increases occurring at the 1‑year tenor and beyond, pushing yields to their highest levels since July 2025. The 10‑year Treasury yield ended the week at 4.39%, up 11 basis points, while the 5‑year yield rose 14 basis points to 4.01%.

The 2‑year yield, which is more sensitive to Federal Reserve policy, posted a pronounced bear‑flattening move, rising faster than longer‑dated yields and finishing the week at 3.88%, up 15 basis points.

Rising yields were driven primarily by renewed inflation concerns stemming from higher oil prices and growing expectations that the Federal Reserve may maintain a higher‑for‑longer rate stance amid the ongoing war in the Middle East.

Since the start of the war with Iran, Treasury yields have risen sharply across the curve, with the 2‑year and 5‑year yields each up 50 basis points, and the 10‑year yield higher by 42 basis points.

Key Treasury Yield Movements:

• 2-year yield: 3.88% (+0.15%)
• 5-year yield: 4.01% (+0.14%)
• 10-year yield: 4.39% (+0.11%)

Rate Cut Expectations

Unlike the prior week—when markets priced in a 0.25% rate cut in December 2026 and a 0.5% cut in December 2027—expectations have shifted meaningfully. Markets now anticipate no rate cuts in 2026, while still pricing in a single 0.5% cut in December 2027, reinforcing the ongoing recalibration toward a higher‑for‑longer rate environment.

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NEXT WEEK’S ECONOMIC CALENDAR:

Key scheduled releases include:

• 3/24 (Tuesday):
  • S&P Global US Manufacturing PMI (March)
  • S&P Global US Services PMI (March)
  • S&P Global US Composite PMI (March)
• 3/26 (Thursday)
  • Weekly Initial and Continuing Jobless Claims

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For a visual representation of this week’s economic review, you can view or download the slide deck here: 03.20.2026 CBC Weekly Economic Update Presentation Slides

Mark Yoon, CFA CPA

EVP & CFO of Commercial Bank of California

Thomas McCullough

EVP of Commercial Bank of California

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All content available on this material is general in nature, not directed or tailored to any particular person, and is for informational purposes only. Any of its content is not offered as investment advice and should not be deemed as investment advice or a recommendation to purchase or sell any specific security. The information contained herein reflects the opinions and projections of Commercial Bank of California (CBC) as of the date hereof, which are subject to change without notice at any time. CBC does not represent that any opinion or projection will be realized. The information contained herein has been obtained from sources considered reliable, but neither CBC nor any of its advisors, officers, directors, or affiliates represents that the information presented on this material is accurate, current, or complete, and such information is subject to change without notice.