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U.S. producer prices recorded their largest monthly gain in five months in December, a development that suggests underlying inflation could be accelerating. This uptick, driven by a sharp rise in the cost of services, may give the Federal Reserve reason to keep interest rates steady in the coming months.

The Labor Department reported on Friday that the Producer Price Index (PPI) for final demand jumped 0.5% last month, beating the 0.2% increase forecast by economists polled by Reuters. This followed an unrevised 0.2% gain in November.

On a year-over-year basis, the PPI rose 3.0% through December, matching the previous month's pace. For the full year, producer prices advanced 3.0% in 2025, following a 3.5% increase in 2024.

Services Costs Fuel the December PPI Spike

The primary driver behind the unexpectedly strong PPI reading was a 0.7% increase in the prices for services, while goods prices remained flat. The surge in services accounted for the entirety of the headline increase.

A key factor was a 1.7% jump in margins for final demand trade services, which measures the change in margins for wholesalers and retailers. This component alone was responsible for two-thirds of the overall services increase.

Other notable price hikes in the services sector included:

• Hotel and motel rooms: Surged 7.3%

• Airline fares: Soared 2.9%

• Portfolio management fees: Increased 2.0%

These components are significant as they feed into the Personal Consumption Expenditures (PCE) price indexes, which are the Federal Reserve's preferred measures for tracking its 2% inflation target.

The Uneven Impact of Tariffs

Economists suggest that the effects of import tariffs are starting to filter through the supply chain, though the impact remains uneven.

"Tariff impacts continued to flow through producer costs unevenly in December," noted Ben Ayers, a senior economist at Nationwide. "At a broad level, costs associated with tariffs remain muted... but localized effects can be pronounced."

Ayers added that the spike in trade services likely reflects "producers looking to recoup some of the losses caused by higher production costs over 2025."

What This Means for the Federal Reserve

The latest inflation data supports the Federal Reserve's current policy stance. The U.S. central bank recently left its benchmark interest rate unchanged in a range of 3.50% to 3.75%.

Fed Chair Jerome Powell acknowledged that tariffs had contributed to an overshoot in inflation but said he expected that pressure to peak around the middle of the year.

The report reinforces the central bank's shifting focus, according to Carl Weinberg, chief economist at High Frequency Economics. "This report validates the pivot of the Fed away from labor market risks back toward price stability," he said.

Economists now estimate that core PCE inflation for December could rise by 0.3% to 0.4%, which would bring the annual rate to 3.0%.

A Closer Look at the Goods Sector

In sharp contrast to services, producer prices for goods were unchanged in December after rising 0.8% in the prior month.

A 1.4% drop in energy prices, driven by lower gasoline costs, weighed on the goods index. Food prices also declined by 0.3%, partly due to a 20.4% plunge in the cost of fresh and dry vegetables.

However, when volatile food and energy components are excluded, producer goods prices advanced 0.4%, up from a 0.2% rise in November.

Market Response and Political Backdrop

The stronger-than-expected PPI data overshadowed President Trump's nomination of Kevin Warsh, a former Fed governor, to replace Powell as head of the central bank.

Following the report, U.S. stocks opened lower, the dollar strengthened against a basket of other currencies, and U.S. Treasury yields rose.

The data release also comes as the Bureau of Labor Statistics (BLS) works to catch up on reports delayed by a 43-day federal government shutdown. Lawmakers were working on Friday to avoid another shutdown that could postpone future data releases.

Traders Backing Warsh for Fed Chair Win Big | President Donald picked Warsh on Friday to be the next Fed chair

Bloomberg Dollar Gauge Fell to Lowest Since 2022 This Week

Source: Bloomberg

President Donald Trump plans to nominate former Federal Reserve governor Kevin Warsh to be the next chair of the central bank, a move that could usher in a new era for U.S. monetary policy.

Warsh, an experienced Wall Street veteran and former Fed official, has recently advocated for lower interest rates and a smaller central bank balance sheet. Analysts broadly see him as a credible candidate who will likely secure Senate confirmation, but they are closely watching to see how he would balance political pressure with the Fed's mandate.

A Central Bank Under Pressure

The nomination arrives at a turbulent time for the Federal Reserve. The institution is grappling with internal policy divisions amid a complex economic outlook, as some members push for lower rates to boost growth while others want to hold firm to contain inflation.

This internal debate is amplified by external challenges to the Fed's independence and credibility. President Trump has repeatedly criticized current chair Jerome Powell and the Federal Open Market Committee (FOMC) for not cutting interest rates more aggressively.

Simultaneously, the central bank faces legal scrutiny. The Supreme Court recently heard arguments on whether President Trump has the authority to remove Governor Lisa Cook. The Department of Justice has also issued subpoenas to the Fed and Powell related to renovations at the bank's offices, a move widely seen by analysts as an assertion of executive power.

Who Is Kevin Warsh?

Kevin Warsh is currently a fellow at Stanford University's Hoover Institution. His career began on Wall Street at Morgan Stanley before he served in the George W. Bush administration on the National Economic Council and as a Federal Reserve governor.

Historically known as a policy "hawk"—an official who favors tighter monetary policy to fight inflation—Warsh's public stance has recently shifted to align more closely with President Trump's views.

He has publicly supported calls for lower interest rates, telling Fox News that Trump's frustration with Powell's policies was justified. In a Wall Street Journal op-ed last fall, Warsh described the Fed's track record under Powell as one of "unwise choices" and argued for reducing the central bank's balance sheet. He has also warned against "mission creep," suggesting the Fed has expanded its role too far.

Market Reaction and Confirmation Outlook

Analysts expect Warsh to be viewed as a reliable choice by financial markets and anticipate a smooth confirmation process.

"Warsh's experience on the Fed, where he developed a reputation as a very competent crisis fighter with a good understanding of financial markets, and his long track record of independent thought about monetary policy mean he is a credible nomination," said Luke Bartholomew, deputy chief economist at Aberdeen Investments.

Christopher Hodge, chief economist at Natixis, noted that Warsh "should have no problem being confirmed by the Senate" and would likely be seen as "fairly credible by the markets."

How Would Warsh Steer Monetary Policy?

While Warsh has recently pushed for lower rates and a reduced Fed balance sheet, analysts are divided on how his leadership would translate into policy decisions once he is in the role. The key question is whether he would prioritize short-term stimulus or revert to his long-held hawkish principles.

The Case for Lower Rates

Hodge identifies Warsh as a supply-side optimist, meaning he believes that policies like tax cuts and deregulation can boost long-term economic productivity. This view, Hodge writes, could serve as a "justification to rapidly lower rates."

However, James Angel, an associate professor of finance at Georgetown University, voiced a common concern. He noted that Warsh "has the background and experience that we expect for a Fed Chair" but added, "My only concern with any Trump appointee is whether he promised Trump that he would bow down to him and lower interest rates too much to try to make things look good at election time."

Will His Hawkish Instincts Return?

Several analysts believe Warsh’s hawkish past could re-emerge, especially if inflation persists.

"It's reasonable to assume that he told the President he favors reducing interest rates today, otherwise he would not have been nominated," wrote Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics. "But Mr. Warsh's hawkish instincts might return once he has secured the Chairmanship."

Tombs pointed out that during his previous tenure at the Fed, Warsh prioritized controlling inflation over employment during a crisis. He concluded that if inflation remains near 3%, Warsh would likely focus more on his historical legacy than on pleasing the president, making "easier-than-otherwise policy under Mr. Warsh... not a given."

Hodge echoed this, stating that if productivity gains from deregulation don't appear and inflation remains "sticky," Warsh would "likely pivot to a more hawkish stance."

The Limits of a Chair's Power

Even as chair, Warsh would be just one of 12 voting members on the FOMC.

Bartholomew of Aberdeen Investments projects that Warsh "will almost certainly push for lower interest rates," consistent with a forecast of two 0.25% cuts later this year. However, he added that Warsh "is unlikely to make much progress in shifting the Fed's operating framework and shrinking its balance sheet" on his own.

What This Means for Near-Term Rate Cuts

Following its January meeting, the Federal Reserve held interest rates steady. Chair Powell described the current policy rate as being "within plausible estimates of neutral," meaning it is neither stimulating nor restricting the economy.

Trump's announcement to nominate Warsh has not significantly altered market expectations for a rate cut. According to the CME FedWatch Tool, bond futures traders are pricing in a 48.5% probability of a rate cut in June, up slightly from 47% before the news.

A Reuters poll of 15 analysts projects the Russian rouble will trade at approximately 88.3 to the U.S. dollar within the next 12 months. This forecast suggests a 14% decline from its current value but marks an 8.7% upward revision from last month’s predictions.

The rouble has already gained 3.5% since the beginning of the year, following a surprising 45% rally in 2025. While a stronger currency helps the central bank manage inflation, it also puts pressure on state budget revenues and exporters.

Geopolitics and Gold Bolster Rouble Outlook

Changing market dynamics have prompted some analysts to revise their forecasts significantly. Sberbank, for instance, has adjusted its projection from 100 roubles per dollar to 90. The bank attributes this shift to a rally in gold and other metals, as well as evolving geopolitical factors that could support the currency throughout the year.

"Negotiations between Russia, the United States, and Ukraine may extend throughout the year, which could support demand for rouble-denominated assets," Sberbank analysts noted in a report.

Negotiators from Ukraine and Russia met in Abu Dhabi last weekend to discuss territorial issues and are expected to resume talks on Sunday. Moscow's core demand remains that Kyiv cedes the entire Donbas industrial region.

Fundamental Drivers and Economic Support

Beyond geopolitics, several core economic factors are underpinning the rouble's stability. Mikhail Vasilyev of Sovkombank highlighted a combination of drivers supporting the currency:

• A consistent trade surplus

• Subdued demand for imports

• The high key interest rate set by the central bank

• Sales of yuan from state reserves under budget rules

• General optimism for an improving geopolitical situation

Economic Growth, Inflation, and Rate Cut Path

Looking at the broader economy, analysts have slightly downgraded their forecast for Russia's GDP growth in 2026 to a median of 1%, down from 1.1% in the previous month's estimate. Concurrently, the 2026 inflation forecast has been revised upward from 5.2% to 5.3%.

These figures are influencing expectations for monetary policy. Analysts now anticipate a more conservative approach from the central bank, forecasting a half-percentage-point cut in the key interest rate to 15.5% in the first quarter of 2026. This is a more cautious view than last month's expectation of a cut to 15%.

The central bank has two rate-setting meetings scheduled for the first quarter. Following a recent spike in inflation, analysts expect policymakers to hold the rate steady at the first meeting on February 13.

"Macroeconomic data so far does not provide a clear indication that the Bank of Russia is ready to cut the key rate," said Nikolai Dudchenko, an analyst at Finam brokerage.

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Corporate news provides updates

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