The United States Producer Price Index excluding food and energy rose 5.2% year-on-year in April.
This was above the forecast of 4.3%.
The April core producer price inflation number came in much hotter than anyone expected at 5.2%. This immediately puts the Federal Reserve in a tough spot, as it suggests underlying price pressures are not cooling down. All eyes are now on their next move regarding interest rates.
We should anticipate a more hawkish stance from the Fed, which means a higher chance of rate hikes or rates staying higher for longer. This suggests positioning for higher interest rates, likely by looking at short positions in Secured Overnight Financing Rate (SOFR) futures. Options strategies that benefit from rising yields will also become more attractive.
For equity markets, this is a headwind, as higher rates can hurt company valuations, especially for growth and tech stocks. We are considering buying put options on major indices like the S&P 500 to hedge against or profit from a potential downturn. Selling call spreads could also be a viable strategy for those expecting a capped upside.
This kind of upside inflation surprise almost always leads to a spike in market uncertainty. We expect the CBOE Volatility Index (VIX) to rise from its current levels, which were recently hovering near 14. Buying VIX call options or futures could be a direct way to trade this expected increase in volatility.
Looking back from our perspective in 2025, we saw a similar pattern throughout 2022 when persistent inflation surprises forced the Fed into an aggressive hiking cycle. The market consistently underestimated how high rates would have to go, punishing those who bet on an early pivot. This historical precedent warns us not to fight a determined central bank.
This data reinforces the hawkish commentary we heard from Fed officials last week, who warned that the mission was not yet accomplished. In fact, following this morning’s release, the CME FedWatch Tool shows the market is now pricing in a 70% probability of a 25-basis-point rate hike at the June meeting, up from just 25% yesterday. This is a significant repricing of expectations.
The focus now shifts to the upcoming Consumer Price Index (CPI) report to see if these producer price pressures are being passed on to consumers. If that report also comes in hot, it will almost certainly lock in a more aggressive policy path from the Fed. We will need to remain nimble as new data arrives.
