PhotoThe government reports inflation at the wholesale level surged in January, rising 0.6%. That reflects an increase in costs before goods go on sale to consumers. At some point, however, consumers should expect to pay at least some of those costs.

Most of the January increase was for food, energy, and trade services. When those categories are stripped out, the Producer Price Index rose just 0.2%.

Prices for what are known as final demand goods moved up 1.0% in January, the largest rise since a 1.0% gain in May 2015. Final demand reflects the final stage of the process when a good or service is offered to retailers.

In January, most of the final demand increase can be traced to energy, which was 4.7% higher. Oil and gasoline prices moved up early in the year on the belief that production cuts by OPEC would reduce supply. So far, the evidence on that has been sketchy.

Gasoline was the big driver

When you drill down deeper into the energy category, you see that gasoline was the big driver there. The Labor Department's Bureau of Labor Statistics reports the gasoline index surged 12.9% in January, even though prices have remained more stable at the retail level.

Costs associated with drug production, iron and steel scrap, home heating oil and natural gas, and pork also moved higher. Their rise was partially offset by a 7.2% decline in beef and veal prices.

Since the financial crisis of 2008, the U.S. inflation rate has remained largely non-existent. The reduction in demand for goods and services actually created a deflationary effect.

The Federal Reserve has kept interest rates near 0% for years in an effort to produce a little inflation in the economy. While high inflation, such as what the U.S. experienced in the 1970s, can be very bad for consumers, economists say some inflation is needed to give businesses the ability to raise prices over time.


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