Uh-Oh: Why These 2 Key Inflation Indicators Are Cause For Worry

A pair of economic indicators are injecting worry into market bulls Thursday morning. Here's a look at what the data means for the Federal Reserve, and ultimately the markets.

What Happened: The producer price index (PPI) increased 6% in January, down from 6.5% in December, according to data from the U.S. Bureau of Labor Statistics.

The number came in hot, topping average economist estimates of 5.5%. On a seasonally-adjusted month-over-month basis, PPI was up 0.7% versus estimates for a 0.4% increase.

The Labor Department then reported jobless claims of 194,000, a decrease of 1,000 from the previous week's revised level. The number came in below average estimates of 200,000. 

Why It Matters: The data comes after the Labor Department on Tuesday reported a 6.4% year-over-year increase in the consumer price index for January, which was down slightly from December, but hotter than economist forecasts. 

Most experts agree the CPI is not coming down fast enough for the Fed to further ease its stance. This week's CPI reading comes on the heels of two consecutive policy downshifts from the Fed, but that trend is all but guaranteed to stop at the central bank's next meeting.

Related Link: 3 Experts Agree: Inflation Is Not Coming Down Fast Enough For The Federal Reserve

Most are anticipating another 0.25% rate hike in March, but Thursday's data could push the Fed toward a more aggressive 0.5% increase.

Economist Mohamed El-Erian said earlier this week the two-Year Treasury yield is the best gauge of what's to come, and it appears he was spot on. 

Following Thursday's data sets, he indicated the economy remains resilient, suggesting this could push the Fed to do more. 

"From lower-than-expected jobless claims to higher-than-expected PPI, today's US data releases are in line with the last few weeks of numbers suggesting that the #economy remains robust," El-Erian said via tweet.

Bill Adams, chief economist for Comerica Bank, pointed to much of the same following the prints. 

"Inflation is proving stickier in early 2023 than anticipated, affirming the Fed’s view that further increases in the federal funds target are justified," he said.

In an interview at the Economic Club of Washington, D.C. last week, Fed Chair Jerome Powell said the Fed remains data-dependent. As new data continues to point to strength in the economy, the Fed is likely to unleash more firepower in its inflation fight.

CME group data shows the bond market continues to price in an increasingly aggressive Fed response. The chance of a 0.5% hike at the Fed's next meeting began the week below 10%. At last check it had nearly doubled, with markets now pricing in a 18.1% chance. 

Investors appear rattled Thursday morning, with the SPDR S&P 500 (NYSE: SPY) down approximately 0.7%. Markets are likely to continue to face selling pressure as investors weigh the likelihood of a more hawkish Fed.

Photo: Angela from Pixabay.