Market Brief: Sticky Producer Price Inflation Leaves Markets Largely Unmoved

Input price inflation rose at faster pace than anticipated in the United States last month, but details under the hood indicated a moderation in some services categories, suggesting that the Federal Reserve’s preferred inflation indicator could slow in month-over-month terms when it is reported next week. Producer prices for final demand climbed 0.4 percent in January relative to the prior month, topping forecasts for a 0.3 percent increase, and rising 3.5 percent on a year-over-year basis, but airline fares and medical care costs declined, putting pressure on the key components that feed through into the core personal consumption expenditures index. Core goods prices accelerated slightly, rising 0.6 percent versus December’s 0.5 percent print, but exhibited little sign of tariff front-running, indicating that “bullwhip effects” haven’t arrived in the tradable goods sector just yet.

US yields are drifting lower, equity markets are adopting a supportive bias, and the dollar is edging down against some of its rivals.

Market-implied inflation expectations surged yesterday when new data showed consumer prices rising more swiftly than had been expected in January, further delaying the next round of rate cuts from the Federal Reserve. According to the Bureau of Labor Statistics, headline consumer prices rose 3 percent in January from a year earlier, beating economist estimates, and a detailed breakdown showed inflation pressures broadening across categories. The report may have been skewed by the “January effect”—driven by businesses repricing products at the beginning of each year—but the Chicago Fed’s Austan Goolsbee called the print "sobering," saying "There’s no question, if we got multiple months like this, then the job is clearly not done".

Inflation fears could ratchet higher in the coming hours: in a post on his social media platform, Truth Social, President Trump this morning said “Today is the big one: reciprocal tariffs”. As far as we understand the concept, this would not be the big one: equalising tariff rates with other countries would mostly impact imports from developing countries in Latin America and Africa which maintain high tariff barriers on agricultural products, and although European and Japanese auto sectors could come into scope, a substantial share of their manufacturing activity already happens in the United States. The proposed 25-percent tariffs on Canada and Mexico would be far more impactful. But it’s possible that we’re wrong, and the administration intends to apply a universal tariff under the “reciprocal” rubric.

The euro is little changed against the dollar after jumping during yesterday’s session when President Trump said the US and Russia would begin talks on ending the war in Ukraine “immediately”, prompting investors to anticipate a drop in imported energy prices, a role in Ukraine’s reconstruction, and a moderation in overall uncertainty levels. Trump discussed the conflict in separate phone calls with Russian President Vladimir Putin and Ukrainian President Volodymyr Zelenskiy shortly after Defence Secretary Pete Hegseth told European allies that a return to Ukraine's pre-2014 borders—before Russia’s annexation of Crimea—was an “unrealistic objective” and ruled out Ukrainian membership in NATO, preemptively moving the West’s negotiating position closer to Russian demands.

We’re not sure the sense of optimism will last. Foreign exchange markets, it must be said, are notoriously bad at processing geopolitical implications, and often fail to adequately price abstract shifts in long-term economic outcomes. If a peace “deal” is made, European countries could be on the hook for hundreds of billions in lending to Ukraine’s government and trillions in new military spending as an emboldened Russian war machine threatens the Union’s eastern flank. For a bloc that has for decades struggled to weigh domestic trade-offs against forming a common front on joint debt issuance, defence policy, and trade strategy, this could prove impossible to manage.

The pound is trading with a firmer bias after the British economy expanded by more than expected in December, helping avert an outright contraction in the fourth quarter. According to updated numbers from the Office for National Statistics, gross domestic product grew 0.4 percent on a month-over-month basis at the end of the year—beating the -0.1-percent consensus estimate—with the services sector doing most of the heavy lifting. But on a full-year basis, inflation-adjusted output in the UK climbed just 0.8 percent in 2024—far short of the 2.8-percent pace hit in the United States over the same period—and rare is the economist who expects this performance gap to narrow substantially over the coming year. The pound’s upside potential remains fairly limited, even as positive rate differentials provide a tailwind.

Economic Calendar