Jump in hotel, airline, food costs may signal higher prices coming for consumers

• PPI jumped 0.5 percent in April.
• Hotter producer prices may mean CPI comes in higher than expected Friday.
• Wholesale level inflation was broad-based in services and goods.

Inflation is back, after disappearing in March, and it's showing up in a broad range of costs for goods and services — from food to hotels.

The producer price index, a measure of inflation at the wholesale level, rose 0.5 percent in April, or 2.5 year over year, in the biggest 12-month increase since February 2012. Consumer inflation is due out Friday morning, and some economists say the hotter PPI could mean the current forecast may be too low. April CPI is expected to show a 0.2 percent gain in core CPI, or 2 percent year over year, compared with a decline of 0.1 percent in March.

For consumers, the higher inflation could mean elevated airline, hotel, and food prices, to name a few, based on what the PPI data show. But economists say it also means that the Federal Reserve is on track to raise interest rates in June, as expected, and that could filter through to higher mortgages and other consumer loans. The Fed's preferred inflation measure, the personal consumption expenditure inflation data lags the CPI, and core PCE was just under 1.6 percent in March

"Inflation is back, but it's not back in a big way," said Chris Rupkey, chief financial economist at MUFG Union Bank. "It's back in PPI. We'll see if it transfers to CPI. There's a strange decline in March month to month in both PCE core inflation and CPI core inflation. It's not totally explained. Hopefully, it's a one-off event."

One unusual factor that hit core and headline CPI in March was a 7 percent decline in wireless telephone services. It was responsible for about a tenth of a percent decline in core CPI. "The question is whether you're going to be getting a bounce back. My guess is you probably won't. It was one off and a persistent one. I'm assuming that category is going to be reasonably close to flat in April, rather than bouncing back in a big way," said Stephen Stanley, chief financial economist at Amherst Pierpont.

Stanley said in April that there could be a bigger-than-usual jump in hotel costs, since PPI showed a 7.5 percent increase. Airline service costs also rose 2 percent, after declining in March. The higher hotel costs were attributed in the government report to elevated costs around Easter, and it's unclear how much will exactly pass through to CPI, after that line item fell 2.8 percent in March, he said.

JPMorgan economist Zina Bushra Saijid said the pass-through from PPI to CPI doesn't show a straightforward lag, as one might expect. "The relationship isn't that clear," said Saijid. "You don't see a direct relationship. It could be that it shows up in April, or it could be, it shows up down the road."

"March was pretty soft, so there's some payback from that likely," she said. Services prices, excluding trade and transportation, rose 0.8 percent, Saijid said. One sector in PPI showing a large increase was brokerage services, up 6.6 percent, but she said the category is volatile. "I think in general the economy is doing good so prices and inflation should be picking up. March was a huge miss. It's kind of uncertain what we're going to get on Friday," she said.

Saijid noted that food prices in PPI rose 0.9 percent for a second consecutive month. Increasing prices for fruits, vegetables and eggs offset declines in meat. For the 12 months through April, food prices were up 1.5 percent in PPI, the fastest rate since January 2015.

Economists said inflation should start to show up even more in wages.

"There's very little slack in the overall economy and eventually wages should pick up and so should inflation," said Kevin Cummins, senior economist at NatWest Markets. He said around 60 percent of core PCE is services, and two-thirds of that is driven by wages. "If you have a tight labor market, you should see a broader pickup in wages," he said.

Labor market strength was apparent in weekly jobless claims Thursday at 236,000. The number of people still receiving benefits fell to a near 30-year low of 1.92 million. The unemployment rate fell to a surprise 4.4 percent in April.

"It's good current inflation came back from last month. That's one factor that makes it more likely we're going to get a June rate hike. ... With the unemployment rate down below full employment levels, inflation has nowhere to go but up," said Rupkey.

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