Dive Brief:

• The producer price index rose at a faster-than-expected pace of 0.5% last month and 2.9% on an annual basis, signaling that the Federal Reserve is still wide of hitting its 2% inflation target.
• Services fueled much of the gain in the PPI, which measures prices charged by wholesalers, with prices for so-called final demand services rising 0.8% in January for the largest increase since July, the Bureau of Labor Statistics said. Prices for final demand goods fell 0.3%.
• While the big gain in services prices “does not really bode well for a booming manufacturing recovery, it also means that demand for services is robust and tariffs are not really a restraint on economic activity,” Scott Helfstein, Global X Head of Investment Strategy, said in a note.

Dive Insight:

Despite the news about higher price pressures, traders in interest rate futures increased the odds that the Fed will cut borrowing costs by June.

Traders on Friday saw a 58% probability that policymakers will trim the main interest rate by at least a quarter-point from its current range between 3.5% and 3.75% compared with a 47% probability on Thursday, according to CME Group’s FedWatch Tool.

Concerns about stability in the market for private credit slammed bank stocks, pushing down the KBW Nasdaq Bank Index by 5%. Also, the yield on the benchmark 10-year Treasury note dipped below 4% to 3.965%.

Fed Governor Christopher Waller, noting signs of persistent inflation and steadiness in the labor market, said in a Feb. 23 speech that holding rates steady may prove the best decision in the weeks ahead.

Waller since mid-2025 has said weakness in the job market warranted monetary easing by the Federal Open Market Committee. He has repeatedly dissented against central bank decisions to forgo reductions in the benchmark interest rate.

“If the labor market data for February are consistent with the stronger job creation and low unemployment rate initially reported in January, indicating that downside risks to the labor market have diminished, it may be appropriate to hold the FOMC's policy rate at current levels and watch for continued progress on inflation and strength in the labor market,” he said.

“But if the good labor market news of January is revised away or evaporates in February, it would support my position at the FOMC's last meeting — that a 25-basis-point reduction in the policy rate was appropriate, and that such a cut should be made at the March meeting,” Waller said.

“As things stand today, I rate these two possible outcomes as close to a coin flip,” he said, adding that the PPI data will provide “a clearer picture” of inflation in January.

Inflation measures have sent mixed signals in the past several weeks.

Inflation as measured by the consumer price index slowed last month to a lower-than-forecast 2.4% from 2.7% in December, according to the BLS. So-called core inflation, which excludes volatile food and energy prices, cooled to 2.5% from 2.6% in December, the BLS said.

At the same time, the Federal Reserve’s preferred measure of inflation — the personal consumption expenditures price index, excluding food and energy costs — has persisted above the central bank’s target for nearly five years.

So-called core PCE increased 3% in December from a year earlier compared with a 2.8% gain in November, according to the Bureau of Economic Analysis.

The unexpectedly high price pressure in the PPI report prompted Bank of America analysts on Friday to raise their estimate for January core PCE to 0.42% from 0.31%. They increased their year-over-year forecast to 3.1% from 3%.

“I am a little more concerned about inflation right now, because I think the job market is pretty steady,” Chicago Fed President Austan Goolsbee said Tuesday.

“I think there's some promising stuff in the inflation reports, but there's also some warning signs,” he said during a Bloomberg Television interview.