A Turning Point for Rate Cuts? Despite CPI and PPI Surging, January PCE Might Be Calm

TradingKey – Following an unexpected drop in the unemployment rate and a surge in CPI, the US PPI rebounded to a two-year high. However, several components feeding into the PCE index provided a breather from concerns that the Fed might delay rate cuts.

PPI Report Breakdown

On Thursday, February 13, the US Bureau of Labor Statistics released the January Producer Price Index (PPI) report:

- Headline PPI rose 3.5% YoY, exceeding expectations and the previous value of 3.3%, marking the highest level since February 2023. On a monthly basis, it increased 0.4% MoM, above the expected 0.3% but lower than the prior month's 0.5%.

- Core PPI (excluding food and energy) climbed 3.6% YoY, surpassing the previous 3.5% and expectations of 3.3%. It increased 0.3% MoM, in line with expectations, though slightly below the revised prior value of 0.4%.

In terms of goods, wholesale prices rose 0.6%, following a 0.5% increase in December. More than half of this increase was driven by a 1.7% rise in energy prices. Meanwhile, food prices climbed 1.1%, with egg prices surging 44% due to an avian flu outbreak, echoing trends in the CPI report.

Service prices rose 0.3%, with about one-third of the increase attributed to a 5.7% rise in wholesale prices for restaurants and motel rooms.

Market Reaction

Despite inflationary pressures, the market found a silver lining in the report:

- Airline fares fell 0.3%

- Physician care prices dropped 0.5%

- Hospitalization costs declined 0.3%

- Hospital outpatient care costs fell 0.4%

These components are key contributors to the PCE index, the Fed’s preferred inflation gauge.

As a result, traders adjusted their expectations for the Federal Reserve’s first rate cut, moving the projected timeline from October to September. All three major US stock indices rose, with the S&P 500 gaining 1.04% to 6,115.07, nearing its historical high of 6,128.18. The US dollar index fell 0.6% to 107.31, boosting non-US currencies.

Focus on the PCE Index

Following the PPI release, major institutions like Morgan Stanley and Goldman Sachs revised their forecasts for the January PCE index. The data, set for release on February 28, will be crucial—if it signals moderation, it could reinforce the case for rate cuts.

Considering both CPI and PPI, economists now expect core PCE to register between 0.2% and 0.3% MoM, lower than the 0.4% forecasted after the CPI release. The annual PCE rate is projected at 2.6%, down from the previous 2.7% estimate.

Economists point out that, under this scenario, the Fed can still argue that progress toward its 2% inflation target is being maintained—potentially keeping rate cuts on the table.