PPI Signals Cooling Inflation Despite CPI Upside Surprise; S&P 500 Climbs

PPI Signals Cooling Inflation Despite CPI Upside Surprise; S&P 500 Climbs

Inflation data from the Producer Price Index (PPI) came in hotter than expected, but key underlying metrics provided some relief for the Federal Reserve’s preferred inflation gauge. The latest PPI figures suggest that the recent Consumer Price Index (CPI) spike—fueled in part by new tariff measures—may not be as alarming as it initially seemed. Investors reacted positively, sending the S&P 500 higher in early Thursday trading.

One of the most significant components of the Fed’s core inflation measure, health care services inflation, eased from 2.9% to 2.6%, offering some reassurance.

Economists have pointed out that early-year inflation data is often distorted by seasonal pricing adjustments, as companies frequently implement price hikes at the start of the year. Their recommendation: wait for February data before drawing firm conclusions about the inflation trajectory.

Even so, the Federal Reserve is likely to maintain its cautious stance, especially as President Donald Trump rolls out an array of new or expanded tariffs. The latest measures, announced Monday, target steel and aluminum, providing a boost to companies like Nucor (NUE) and Steel Dynamics (STLD). Additional “reciprocal tariffs” are expected to be revealed later today.

PPI Breakdown

The overall PPI rose 0.4% for the month and 3.5% year-over-year, surpassing estimates of 0.3% and 3.2%, respectively.

Core PPI—excluding food and energy—met expectations with a 0.3% monthly increase. However, the annual core PPI inflation rate rose to 3.6%, exceeding the 3.3% consensus due to data revisions.

Key components that influence the Fed’s preferred inflation measure, the core PCE price index, showed a continued decline.

Health services prices saw notable declines:
• Physician services fell 0.5%
• Outpatient hospital care dropped 0.4%
• Inpatient hospital care declined 0.3%

Meanwhile, airline passenger service prices also slipped 0.3%.

Following the release of the PPI data, Pantheon Macroeconomics’ chief U.S. economist Samuel Tombs forecasted that the core PCE inflation rate will fall from 2.8% to 2.6% when January’s report is published on February 28.

CPI Surprises To The Upside

The headline CPI rose 0.5% for the month, lifting the annual CPI inflation rate from 2.9% to 3%.

Core CPI, which strips out food and energy prices, climbed 0.4%, exceeding expectations of 0.3%. This pushed the annual core inflation rate up to 3.3%, rather than declining to the anticipated 3.1%.

On a more granular level, the core CPI increase was 0.446% when rounded to thousandths, meaning the headline 0.4% rise slightly understates the true inflation uptick. The annual core inflation rate of 3.3% was also slightly inflated, with the exact figure coming in at 3.258%.

Surge In Goods & Services Prices
The upside surprise in core CPI inflation was driven by gains in both goods and services:
• Core goods prices increased 0.3%, marking the largest monthly rise since May 2023.
• Core services prices climbed 0.5%.

Other key contributors:
• Hotel and motel prices surged 1.7%.
• Owners’ equivalent rent, a major core CPI component, rose 0.3%.
• Transportation services spiked 1.8%.

Market Reactions To Inflation Data

“Inflation remains stubborn, with categories like used cars and auto insurance rebounding,” noted David Russell, head of market strategy at TradeStation. However, he suggested that investors may hold back on aggressive moves until more economic data is available ahead of the Fed’s March dot plot update.

Conversely, Samuel Tombs of Pantheon Macroeconomics downplayed the concerns, arguing that seasonal adjustments can distort data at the start of the year. He cautioned against drawing conclusions from a single month’s figures and emphasized waiting for February’s report.

Powell’s Fed Testimony

Fed Chair Jerome Powell continued his congressional testimony, appearing before the House Financial Services Committee on Thursday morning.

While Powell reiterated that the economy remains strong, he had yet to comment on the latest CPI surprise. He reaffirmed that monetary policy will likely remain restrictive for an extended period, contingent on labor market conditions and inflation progress.

Rate-Cut Expectations Shift

Market expectations for Fed rate cuts shifted following the inflation reports. According to the CME FedWatch tool:
• Odds of a rate cut in March have fallen to just 2.5%.
• May rate cut expectations dropped to 14.5%.
• June cut probability now stands at 39.5%, down from 50% earlier in the week.
• July rate cut odds are roughly even at 49% to 51%, improving from Wednesday’s 42% to 58%.

Trump Tariffs And Inflation

The inflationary impact of Trump’s tariffs remains uncertain, as it depends on exchange rate movements, consumer behavior, and retailer pricing strategies.

According to Deutsche Bank economists, new and existing tariffs—including those on steel, aluminum, and reciprocal duties—could push core inflation above 3.5% in 2025.

The reciprocal tariff policy is aimed at matching import duties imposed by trading partners. Deutsche Bank estimates that this could raise the average tariff rate by 3.3 percentage points, potentially adding 0.25 to 0.4 percentage points to inflation.

The steel and aluminum tariffs alone may contribute a small but notable increase, particularly affecting the auto and appliance industries.

Trump Pushes For Rate Cuts

In a social media post early Wednesday, President Trump once again urged the Fed to lower interest rates, linking the move to his tariff strategy.

“Interest rates should be lowered, something which would go hand in hand with upcoming Tariffs!!! Let’s Rock and Roll, America!!!” Trump wrote.

S&P 500 Climbs Despite Inflation Jitters

The S&P 500 gained 0.5% in early Thursday trading, rebounding after a 0.3% decline on Wednesday, when the index initially dropped 1.1% at the open following the CPI report.

​Despite the rebound, the S&P 500 remains 1.1% below its record closing high from January 23.