Inflation Spikes, Rattling Markets

The January Producer Price Index was driven by a sharp 0.8% month-over-month surge in service costs, the largest such increase since July 2025. A primary culprit was a 14.4% jump in margins for professional and commercial equipment wholesaling. While service inflation accelerated, goods prices actually fell 0.3%, thanks to a 5.5% drop in gasoline prices. The year-over-year wholesale inflation now stands at 2.9%, a figure that challenges the narrative of a "soft landing" for the economy. The core PPI, which excludes volatile food and energy sectors, painted an even starker picture with a 3.6% annual increase, feeding concerns that price pressures are becoming structurally embedded. In its downgrade, UBS cited more than just inflation. The bank pointed to the U.S. stock market's high valuation, with price-to-earnings ratios 35% above international markets, a significant premium compared to the 4% average since 2010. A weakening U.S. dollar and uncertainty surrounding Washington's policies on tariffs and financial regulations also factored into the more cautious stance. The market's anxiety was compounded by escalating military conflict in the Middle East, where the U.S. and Israel launched strikes against Iranian missile and naval infrastructure. This action immediately raised fears of a disruption to the 20 million barrels of oil that pass through the Strait of Hormuz daily, which accounts for nearly 20% of global consumption.