In December, U.S. headline Producer Prices increased by 3%, surpassing predictions of 2.7% and matching the rise from the previous month. Excluding food and energy, core Producer Prices were up by 3.3% year-over-year, exceeding the forecast of 2.9% and improving from the previous month’s 3% gain.
On a month-to-month basis, the headline Producer Price Index (PPI) saw an increase of 0.5%, while the core PPI rose by 0.7%. The U.S. Dollar gained strength, nearing two-day highs of 96.60, reflecting the economic data and the nomination of Kevin Warsh as the potential next Federal Reserve Chair.
Understanding Inflation
Inflation measures the price rise in a standard basket of goods and services, presented typically as a percentage change monthly and annually. Core inflation, without the volatile elements of food and fuel, is monitored by economists and targeted by central banks.
The Consumer Price Index (CPI) records changes in the cost of a select basket of goods over time, typically as a month-on-month or year-on-year percentage. High inflation can boost the value of a currency due to increased interest rates by central banks, meanwhile, gold often benefits from lower inflation as it reduces interest rates, making gold a more attractive investment.
We saw the numbers from last month showing producer prices were hotter than anyone expected at the end of 2025. That 3.3% core print confirmed our view that inflation was becoming sticky again. This wasn’t a one-off event, but a trend we had been watching develop in the fourth quarter.
This producer pressure has since been confirmed by the December Consumer Price Index (CPI) data released two weeks ago, which showed consumer inflation also accelerating to 3.4%. The most recent weekly jobless claims data, released yesterday, showed claims falling to 201,000, indicating the labor market remains tight. This suggests wage pressures will continue to feed into higher prices for services.
Market Implications And Interest Rate Speculation
Given this data, we believe 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 to Fed Chair reinforces the idea that the central bank will prioritize fighting inflation. We are therefore adjusting positions in interest rate futures to reflect a “higher for longer” rate environment.
This outlook points to continued US Dollar strength in the weeks ahead, much like we saw during the aggressive hiking cycle back in 2022. We are looking at call options on the U.S. Dollar Index as a way to gain exposure to this expected trend. Conversely, this environment makes holding non-yielding assets like gold less attractive.
We must remain cautious, as any unexpected signs of a sharp economic slowdown could quickly change the narrative. We are closely watching the upcoming ISM Manufacturing survey for January, as last year’s data showed the manufacturing sector was in contraction for most of 2025. A surprisingly weak reading could cause the market to rapidly re-price the path of interest rates.
