In December, U.S. headline Producer Prices went up by 3%. This was higher than the predicted rise of 2.7% and matched the increase from the previous month. When we exclude food and energy, core Producer Prices rose by 3.3% compared to last year, which is more than the forecast of 2.9% and slightly up from last month’s 3% increase. On a monthly basis, the headline Producer Price Index (PPI) climbed by 0.5%, while the core PPI increased by 0.7%. The U.S. Dollar gained strength, reaching nearly two-day highs of 96.60, influenced by this economic data and the nomination of Kevin Warsh as the potential next Federal Reserve Chair.

Understanding Inflation

Inflation shows how prices are rising for a basket of common goods and services, usually expressed as a percentage change over a month or a year. Economists pay close attention to core inflation, which excludes the fluctuating costs of food and energy. Central banks often target this measure. The Consumer Price Index (CPI) tracks how the cost of a selected basket of goods changes over time, reported as monthly or yearly percentage changes. High inflation can increase a currency’s value because central banks may raise interest rates. On the other hand, lower inflation can make gold more appealing since it often leads to reduced interest rates. Last month, producer prices were hotter than expected, with a 3.3% core increase that confirmed our belief that inflation is becoming persistent. This isn’t just a temporary spike; it reflects a trend we noticed in the fourth quarter. The December Consumer Price Index (CPI) data released two weeks ago confirmed this, showing consumer inflation rose to 3.4%. Additionally, the latest weekly jobless claims, released yesterday, dropped to 201,000, showing that the labor market is still tight. This suggests that wage pressures will likely contribute to rising service prices.

Market Implications And Interest Rate Speculation

Considering this data, we think the market is too optimistic about the Federal Reserve cutting interest rates in the first half of this year. The nomination of a known hawk like Kevin Warsh as Fed Chair suggests the central bank will focus on controlling inflation. Therefore, we are changing our positions in interest rate futures to reflect a “higher for longer” rate environment. This outlook points to a stronger U.S. Dollar in the coming weeks, similar to what we observed during the aggressive rate hikes back in 2022. We are looking at call options on the U.S. Dollar Index to take advantage of this expected trend. Conversely, this environment makes holding non-yielding assets like gold less attractive. We need to stay cautious, as unexpected signs of a sharp economic downturn could quickly shift this narrative. We are monitoring the upcoming ISM Manufacturing survey for January closely, especially since last year’s data showed the manufacturing sector was mostly in contraction during 2025. A surprisingly low reading could lead the market to adjust its outlook on interest rates. Create your live VT Markets account and start trading now.

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