U.S. inflation has exploded again! January PPI exceeded expectations across the board, and the market has begun to price in a "restart of interest rate hikes."

According to the latest inflation data released in the United States, the PPI inflation exceeded economists' expectations, reaching its highest point in half a year, indicating that food and energy prices continue to drive up inflation in the U.S. Wholesale prices in January rose, highlighting that progress in the Federal Reserve's fight against inflation has nearly stalled before the Trump administration continues to impose tariffs, and the current interest rates seem insufficient to push inflation down sustainably. This is why some interest rate futures market traders, after yesterday's CPI showing soaring inflation and the latest PPI release, expect that the Federal Reserve will not only choose to "not cut interest rates throughout the year" but may also restart interest rate hikes in the second half of this year.

According to the latest report released by the U.S. Bureau of Labor Statistics on Thursday, the so-called Producer Price Index (PPI) measuring final demand rose by 0.4% month-on-month in January, and the December PPI inflation was revised to a month-on-month increase of 0.5%, up from a previous increase of 0.2%. The median forecast among economists compiled by Bloomberg was a month-on-month increase of 0.3% in January, which clearly exceeded expectations. Compared to the same period last year, the PPI increased by 3.5%, surpassing the market's general expectation of 3.2%.

Excluding the impact of food and energy, the so-called core PPI rose by 0.3% month-on-month and increased by 3.6% year-on-year, both significantly exceeding economists' general expectations. Notably, the month-on-month increase in the core PPI for December was significantly revised up from 0% to 0.4%, and the year-on-year increase was revised up from 3.5% to 3.7%, highlighting the stickiness of inflation and the overall inflation showing a strong "comeback momentum."

Details of the PPI report show that food prices rose by 1.1%, with egg prices soaring by 44% compared to the previous month due to the ongoing avian influenza outbreak in the U.S. Energy prices increased by 1.7%. This year, commodity prices in the U.S. market have generally risen, with the Bloomberg Commodity Index nearing its highest level since May, partly due to rising prices for metals, corn, and coffee.

Following the soaring CPI, the PPI has also surged

Before the release of the unexpectedly high PPI statistics for January, a report on the Consumer Price Index (CPI) released on Wednesday showed that U.S. inflation was unexpectedly "hot," indicating that core inflation at the beginning of this year reached its highest level since March 2024. The CPI in January rose by 0.5% month-on-month, marking the largest increase since August 2023. The overall CPI in January showed a year-on-year increase of 3%, the largest increase since June 2024, and the January CPI significantly exceeded economists' expectations both month-on-month and year-on-year.

It is worth mentioning that a survey conducted by the University of Michigan last week showed that due to households believing that "avoiding the negative impact of tariff policies may be too late," U.S. consumers' "one-year inflation expectations" soared to the highest level in 15 months at the beginning of February, with one-year inflation expectations jumping directly from the previous month's survey of 3.3% to 4.3% These latest inflation data have significantly lowered economists' and interest rate futures market traders' expectations that the Federal Reserve will cut interest rates more than once in 2025. Some economists even believe that due to the impact of increased tariffs, the Federal Reserve may not cut rates at all throughout the year.

According to the Federal Reserve rate cut expectations compiled by the CME "FedWatch Tool," interest rate futures traders are generally betting on only one rate cut for the entire year, most likely to occur in September, with the pricing in the swap market similar to the expectations shown by CME.

More notably, as Federal Reserve Chairman Jerome Powell recently stated in Congress that the Fed's monetary policy may adjust in response to the Trump administration's tariffs and tax cuts, some traders have even begun to believe in the view of former U.S. Treasury Secretary Larry Summers, known as the "inflation hawk"—that the Fed may not further cut rates in the current cycle and may even raise rates. The chief economist from Apollo Global Management even predicted that the Fed could raise rates as early as June.

This week, Federal Reserve Chairman Powell told lawmakers in Congress that inflation expectations "seem to be stabilizing," and that the Fed has room to maintain sufficient patience in lowering interest rates, with reducing inflation to 2% being the Fed's top priority. However, Powell also noted that President Trump's policy proposals, including tariff measures and domestic tax cuts, have introduced a degree of uncertainty into the U.S. economic outlook and inflation expectations.

On Tuesday, Federal Reserve Chairman Jerome Powell emphasized in the Senate that the Fed does not need to rush to adjust interest rates and stated that inflation has eased but remains above the Fed's target level. He warned that if policies are loosened too quickly or excessively, it could affect the process of inflation decline.

Economists and interest rate futures traders are closely monitoring the PPI inflation data report, as several components directly impact the Fed's preferred inflation measure—the core Personal Consumption Expenditures Price Index (the so-called core PCE).

The January PPI data showed that some categories relevant to PCE calculations experienced price declines, including decreases in most healthcare items and airfare prices. However, the fees for portfolio management services, which carry a high weight in core PCE, have risen for two consecutive months.

"Hawk" warns again after four years: The Fed's rate cut cycle may be over, and the next step may be rate hikes

Four years ago, former U.S. Treasury Secretary Lawrence Summers criticized U.S. fiscal and monetary policymakers for overstimulating the economy, which could trigger the most severe inflation in a generation. Now, he warns that there is a risk of renewed price pressures. He urges the Fed to remain vigilant about price pressures and believes that the current cycle may not see further rate cuts and may even see rate hikes. Summers stated, "This may be the most sensitive moment for inflation escalation since the severe inflation triggered by policy missteps in 2021."

In early 2021, Summers warned that President Biden's $1.9 trillion fiscal plan could exacerbate inflation, which made some Democrats uneasy. He also criticized the Fed for not paying enough attention to price risks. Powell admitted in March 2022, "In hindsight, we should have acted sooner" to raise rates Torsten Slok, the chief economist at Apollo Global Management, recently stated that if historical averages are taken into account, the Federal Reserve may start raising interest rates as early as June. This seasoned economist warned that Trump's tariffs would exacerbate the economy and significantly increase inflation.

The economist pointed to a chart showing the historical range of time between the last rate cut and the first rate hike. Last year, the Federal Reserve cut rates three times amid signs of declining inflation. However, with inflation progress slowing and indications that the job market is stabilizing, the Federal Reserve maintained interest rates at its January meeting, and Slok predicted a possible return to rate hikes in June.

Following Powell's latest remarks in the Senate, Timiraos from the "New Federal Reserve News Agency" commented that Powell summarized the Federal Reserve's path for 2025: maintain interest rates if there is no progress in declining inflation; cut rates if the economic slowdown is more pronounced.

A team of economists from Bank of America stated after the CPI was released that the latest data bolstered their confidence in "high rates"—that the Federal Reserve's rate-cutting cycle has ended and that the probability of rate hikes is not zero. "While the likelihood of a rate hike remains low, it now seems less unimaginable."