U.S. wholesale inflation came in hotter than expected in January, adding a fresh wrinkle to the Federal Reserve’s already delicate balancing act on interest rates.
The Labor Department reported Friday that its Producer Price Index (PPI) — which measures price changes before they reach consumers — rose 0.5% from December and 2.9% from a year earlier. Economists surveyed by FactSet had forecast a 0.3% monthly increase and a 1.6% annual gain.
The upside surprise didn’t stop there.
Excluding volatile food and energy prices, so-called core wholesale prices climbed 0.8% month over month and 3.6% from a year ago — both well above expectations. The annual core increase was the largest since March of last year.
Services Drive the Upside
Much of January’s acceleration came from services, particularly higher profit margins for retailers and wholesalers.
That detail is significant.
It suggests companies may be maintaining — or expanding — pricing power, even as tariff costs shift and input prices fluctuate. Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, noted that while retailers’ tariff bills have edged down in recent months, selling prices have continued to rise.
Core goods prices also strengthened, rising 0.7% from December and 4.2% year over year. Hefty increases were reported in categories including cosmetics, pet food, certain metals, and metal-cutting machinery.
In contrast, energy prices provided some relief. Gasoline prices dropped 5.5% from December and were down 15.7% from a year earlier. Wholesale food prices also declined.
A Mixed Inflation Picture
The hotter PPI report comes just two weeks after consumer price data showed more moderation. The Consumer Price Index (CPI) rose 2.4% year over year in January — moving closer to the Federal Reserve’s 2% target.
But wholesale inflation can act as an early indicator of future consumer price pressures. Some PPI components — particularly health care and financial services — also feed directly into the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index.
In December, PCE inflation rose 2.9% year over year, marking its fastest pace since March 2024.
For policymakers, that backdrop complicates the rate outlook.
The Fed cut its benchmark rate three times last year in response to a cooling labor market. However, it has since adopted a more cautious stance, signaling it wants clearer evidence that inflation is sustainably moving toward 2%.
Following Friday’s report, Nationwide economist Ben Ayers said he expects the Fed to remain on pause at its upcoming March meeting.
Why It Matters for Investors
Markets have been wrestling with two competing narratives in 2026: moderating consumer inflation versus persistent underlying price pressures.
The stronger-than-expected wholesale reading reinforces the idea that inflation may prove stickier than hoped — especially in services and core goods. For equities, that could mean renewed volatility if bond yields rise on expectations of prolonged higher rates.
For fixed-income investors, it underscores that the path to further rate cuts may not be straightforward.
In short, January’s data doesn’t signal a resurgence of runaway inflation. But it does suggest the Fed’s job isn’t finished — and markets may need to recalibrate expectations for how quickly monetary easing resumes.
