The US Producer Price Index excluding food and energy rose by 0.8% month on month in January. This was higher than the forecast of 0.3%.
The data shows producer prices increased faster than expected during the month. The figures refer to the index that removes food and energy components.
Inflation Outlook Shifts
The surprisingly high 0.8% core producer price reading for January has shifted our view on inflation’s path. This data suggests that price pressures are more persistent than we previously anticipated. Consequently, we now expect the Federal Reserve to delay any potential rate cuts and possibly signal a more hawkish stance in its upcoming March meeting.
Given this outlook, we are considering positions that benefit from higher short-term interest rates for longer. Selling SOFR futures or buying puts on Treasury note futures could be effective strategies. The interest rate futures market has already reacted, with the implied probability of a rate cut by June 2026 falling from over 50% to just 20% in the last 24 hours.
For equity indexes like the S&P 500, this inflation data increases downside risk as higher rates pressure company valuations. We are positioning for this by purchasing put options, providing a hedge against a potential market downturn. Looking back at the market’s reaction to stubborn inflation in 2022 and 2023, we recall that high-growth technology stocks were particularly vulnerable, a pattern we expect could repeat.
This unexpected data has increased uncertainty about the Federal Reserve’s next move, which is fuel for market volatility. The CBOE Volatility Index (VIX) has already spiked over 15% to 18.5, reflecting this new market anxiety. We believe long positions in VIX futures or call options are now attractive, as this policy uncertainty is unlikely to resolve quickly.
