Implications:   Following in the footsteps of Tuesday’s CPI report, producer prices came in hotter than anticipated, complicating the Fed’s path forward.  While headline prices rose 0.3% in January, the inflation was limited by continued declines in energy prices, which fell 1.7% in January following a massive 31.6% annualized decline in the fourth quarter of last year.  Food prices – the other typically volatile category - also declined in January, down 0.3%.  Stripping out these two components shows “core” prices rose 0.5% in January, the largest single month increase since July.  That said, the twelve-month rise in core prices has been easing since peaking at 9.7% back in March of 2022, and now shows core prices up 2.0% from a year ago.  Diving into the details of today’s PPI report shows the dichotomy between goods and services.  Services prices rose 0.6% in January in spite of a drop in costs for transportation and warehousing.  Meanwhile, goods prices declined 0.2%.  However, energy played a central role in the drop in goods prices; strip out energy, and goods prices rose 0.2% in January as prices for communications equipment and soft drinks moved higher.  Further back in the pipeline, processed goods prices fell 0.2% in January and are now down 3.8% in the past year.  Meanwhile unprocessed goods prices rose 0.1% in January but remain down 15.0% in the past year.  Further easing in inflation appears on the way should the Fed have the patience to let tight monetary policy do its work.  But inflation risks rearing its ugly head once again should the Fed falter and overreact in the face of weakening economic data.  The markets - and the Fed itself – seem unsure how soon or how quickly rate cuts will come. We believe patience is a virtue.

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