US Stocks Slip as December PPI Beats Forecasts, Stoking Rate Concerns
Hotter-than-expected producer inflation reinforces hawkish Fed outlook and delays rate cut expectations
US stocks declined on Friday after December producer prices rose more than economists forecast, reigniting concerns that inflation remains stubborn and could keep the Federal Reserve from cutting rates as quickly as markets anticipate.
The producer price index for final demand increased 3.3% year-over-year in December, well above the 2.7% projection, while core PPI, excluding food, energy and trade services, also climbed 3.3% versus an estimated 2.9%, according to Bloomberg. On a monthly basis, core PPI cooled to 0.1% compared with expectations for 0.3% growth, providing some relief on sequential price pressures.
The market reaction was muted but telling. The Dow Jones Industrial Average edged up 0.1%, while the broader S&P 500 slipped 0.1% and the technology-heavy Nasdaq Composite fell 0.7%, as reported by Saxo Bank. Technology stocks led declines, reflecting their sensitivity to higher interest rate expectations.
The inflation reading arrives at a critical juncture for monetary policy. The Federal Reserve held interest rates steady at 3.5% to 3.75% during its January 28 meeting, pausing after three consecutive cuts in late 2025, according to Trading Economics. The central bank's own December projections signaled only one 25-basis-point cut for all of 2026, with markets currently pricing that move for June. Hotter producer inflation could push that timeline further into the year.
"Inflation remains stubbornly above the Fed's 2% target," economists at Trading Economics noted, highlighting the challenge facing policymakers as they weigh resilient economic growth against persistent price pressures. The Atlanta Fed's GDPNow model estimates real GDP growth of 4.2% for the fourth quarter of 2025, suggesting the economy retains considerable momentum.
Adding to the policy uncertainty, President Trump has nominated Kevin Warsh to succeed Jerome Powell as Federal Reserve Chair when his term expires in May 2026. Warsh is perceived as potentially more hawkish than the current leadership, which some analysts believe could signal a stricter monetary stance.
The December PPI report provides pipeline inflation data that typically feeds into consumer prices with a lag. While the monthly core figure offered encouragement, the annual readings remain elevated, particularly in services categories that tend to be more persistent. Energy prices, which can be volatile, surged 4.6% in November including a 10.5% jump in gasoline costs, according to the Labor Department's November report.
Investors will now turn their attention to the Consumer Price Index report next week and Fed officials' upcoming speeches for additional clarity on the rate path. With the labor market showing signs of stabilization and economic growth remaining robust, the central bank appears poised to maintain its data-dependent approach, keeping rate cuts on hold until inflation demonstrates a more convincing descent toward target.