Inflation dominates the current financial landscape, following a surge in the Producer Price Index (PPI) that revealed wholesale prices rose significantly more than anticipated in January. This raises concerns that inflation may not be tapering as quickly as economists had hoped.

The PPI, which measures prices received by U.S. producers of goods and services, experienced a 0.3% increase in the first month of the year. This is the most substantial surge since August 2023. Economists had projected a 0.1% increase, following a 0.2% decrease in December.

Excluding the volatile Food and Energy categories, the “core” PPI rose by 0.5%, compared to an expected 0.1% inflation. Excluding food, energy, and trade services, the PPI surged by 0.6%, marking the “biggest one-month advance” since January of the previous year, according to CNBC.

Today’s PPI confirms Tuesday’s Consumer Price Index (CPI) report, which also indicated higher-than-expected inflation. The CPI, which measures consumer prices, revealed an annual inflation rate of 3.1%, surpassing the forecast of 2.9%. Additionally, the core CPI escalated by 3.9% year-over-year (YOY), exceeding projections of 3.4%.

Implications for the Stock Market

The hotter-than-expected CPI and PPI readings have reignited concerns among investors. Notably, equity markets experienced a downturn on Tuesday following the CPI release and are likely to face similar conditions on Friday in response to the PPI.

It appears that investors are growing skeptical about the Federal Reserve’s willingness to implement rate cuts before the second half of the year, given the mounting evidence that inflation is not receding as rapidly as previously assumed.

“PPI came in this morning above expectations, proving once again that the inflation battles are far from over. Rate cut expectations have plummeted while yields have surged,” remarked Alex McGrath, Chief Investment Officer for NorthEnd Private Wealth.

Elevated interest rates have the potential to impede economic growth, leading to increased unemployment and reduced spending. Consequently, Wall Street has been eagerly anticipating rate cuts this year.

Fed Chair Jerome Powell previously indicated that three rate cuts were in the pipeline for this year. However, during the January policy meeting, Powell informed reporters that Fed officials would require more favorable data demonstrating a decline in inflation before deciding to lower the benchmark rate. Unfortunately, it is improbable that this week’s inflation reports will be considered as such “favorable data.”

According to the CME FedWatch Tool, interest rate traders are indicating an almost 90% likelihood that the Fed will maintain rates at the March policy meeting. This is a stark reversal from early January when traders predicted over a 70% chance of a rate cut in March.

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.