In January, the producer price index edged up by 0.4%, following a revised 0.5% gain in December. This marks the hottest two-month stretch of inflation since February of last year. The main culprits were food and energy, which jumped 1.1% and 1.7%, respectively.
When we exclude these volatile categories, core final demand inflation rose by just 0.1%. This minimal increase might provide some comfort to the market, especially after Wednesday’s strong consumer price index report, which has led to reduced expectations for rate cuts.
Interestingly, the personal consumption expenditures (PCE) index—the Fed’s favorite measure of inflation—may come in lower than what the consumer price index (CPI) and producer price index (PPI) suggest. Key components that contribute to the PCE, like airline services and medical care, showed either significant declines or slower growth rates.
Based on the current data, we estimate that the PCE’s monthly change will likely be about 0.4% for January, with the core figure staying at 0.2%. This would translate to an annual inflation rate of 2.5% for both overall and core numbers, which is more manageable compared to CPI trends.
However, the inflation outlook raises some concerns. Since new tariffs on imported goods didn’t take effect in January, we might see a quicker rise in inflation soon. There’s still a lot of uncertainty around the specifics and scale of these tariffs, complicating our understanding of their potential impact.
The tariffs on raw materials, like steel and aluminum, could broadly influence overall inflation. The current trend of slowing inflation may be coming to an end, possibly stabilizing between 2.5% and 3% or even higher, depending on trade and immigration policies.
This instability puts the Fed in a tough spot regarding interest rates. The market is anticipating only one rate cut this year, and we may even see no cuts at all. We advise caution against reacting too strongly to January’s inflation data, as it might be skewed by seasonal factors. Last year’s similar situation turned out to be more background noise than a lasting trend.
