Inflation spike dashes hopes for early rate reductions as Bitcoin value declines.

The Producer Price Index for December not only exceeded forecasts but also uncovered a lingering issue that compels markets to reevaluate the entire interest rate trajectory for 2026.

The final demand PPI experienced a 0.5% increase month-over-month, marking the most significant rise since July, primarily fueled by a 0.7% increase in services, while prices for goods remained unchanged. The year-over-year headline came in at 3.0%, surpassing the anticipated 2.7%, but the core PPI climbed to 3.3% from 2.9%, reaching its highest point since July 2025.

Markets reacted swiftly to the news. Bitcoin fell below the $82,400 level while attempting to recover from an intraday low of $81,100. At the same time, Fed funds futures were adjusted to reflect just 52 basis points of cuts for the entirety of 2026, with the first anticipated quarter-point adjustment now expected in June.

The dollar index rose by 0.82% over the last 24 hours, and real yields on 10-year TIPS are hovering around 1.90%.

This leads to the inquiry of whether this confirms that disinflation has stalled exactly where the Fed must pay attention: in services, where pricing power remains robust, and profit margins are expanding rather than contracting.

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What truly heated up and why it is significant

The report for December demonstrated enduring pricing power instead of temporary shocks.

<p Margins in trade services, which represent the difference between what wholesalers and retailers pay versus what they charge, surged by 1.7%. Portfolio management fees increased by 2.0%, airline fares rose by 2.9%, and hotel room rates jumped by 7.3%.

These categories are not influenced by fluctuating commodity prices; instead, they are sectors where companies successfully transfer costs to consumers.

Energy prices fell by 1.4%, which would typically pull the headline lower. However, the strength of services overshadowed this drop. Even when excluding trade, transportation, and warehousing, services still increased by 0.3%.

The Bureau’s narrowest core measure rose by 0.4% for the eighth consecutive month, pushing the year-over-year rate to 3.5%.

The eight consecutive monthly increases in this most persistent subset of PPI argue against dismissing it as mere noise. Trade margins can quickly reverse if demand diminishes, but the broader services figures indicate that companies maintain pricing power across various segments.

This represents the inflation that the Fed targets when discussing the “last mile” issue.

In December, PPI increased by 0.5% month-over-month, driven by a 0.7% rise in services while goods remained unchanged, with notable hotel increases of 7.3%.

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The PPI-to-PCE connection and the Feb. 20 threshold

Producer prices do not directly dictate monetary policy, as the Federal Reserve observes Personal Consumption Expenditures inflation, which will be published on Feb. 20. Nevertheless, PPI components are systematically included in PCE calculations.

Portfolio management, airfares, and accommodations all appear as contributors to core PCE, meaning that December’s robust PPI will influence the print markets that will be analyzed in three weeks.

Currently, economists project that the core PCE for December will fall between 0.3% and 0.4% month-over-month, indicating roughly 3.0% year-over-year.

The Cleveland Fed’s nowcast estimates January 2026 core PCE to be around 2.76% year-over-year. This figure remains above the Federal Reserve’s 2% target, but it is not accelerating into the mid-3% range that would trigger an immediate hawkish shift.

The government shutdown disrupted data collection, making it necessary for the BEA to approximate missing CPI inputs for the October PCE report. The risk of revision is higher than usual, which means that the first print on Feb. 20 might not be definitive.

Markets dislike uncertainty, and ambiguity surrounding the Fed’s preferred inflation measure keeps real yields high and risk assets unstable.

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What the market currently believes

As of Jan. 30, Fed funds futures indicate approximately 52 basis points of cuts throughout 2026, with two quarter-point adjustments, the first likely occurring in June. The market assigns less than a 30% chance to cuts in March or April and around a 65% probability for a June move.

This stands in contrast to the Fed’s December Summary of Economic Projections, where the median participant anticipated the policy rate would conclude 2026 at 3.375%, roughly one cut from the current 3.50%-3.75% range.

The Congressional Budget Office (CBO) projected that the policy rate would drift down to about 3.4% by the fourth quarter of 2026 and remain stable through 2028, with inflation staying above 2% for years due to tariffs and tax reductions.

The market is pricing in slightly more easing than the Fed’s median dot, but significantly less than the “normalization” path some had hoped for.

The CBO’s forecast suggests that inflation won’t respond favorably even with mild easing. Rates are likely to stay elevated longer, not because the Fed is adopting a hawkish stance, but due to the economy’s inability to deliver the disinflation required to warrant deeper cuts.

Markets are pricing in roughly two rate cuts in 2026 starting in June, while the Fed’s median projection indicates one cut and the CBO anticipates rates remaining close to 3.4% through 2028.

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Three scenarios for interest rates and Bitcoin

The baseline scenario for interest rates and Bitcoin involves two cuts beginning in June.

If the Feb. 20 PCE registers around 0.3%-0.4% month-over-month, confirming persistent but not accelerating inflation, the Fed will implement two cuts of approximately 50 basis points, maintaining a policy that is restrictive enough to control inflation without hindering growth.

For Bitcoin, this scenario suggests volatile conditions. Elevated real yields and a strong dollar create opportunity-cost challenges, yet a trajectory of two cuts doesn’t equate to outright tightening.

The hawkish scenario anticipates “higher for longer.” If the Feb. 20 core PCE shows 0.4% month-over-month, and subsequent months do not cool off, with broad services inflation persisting, the Fed might only deliver one cut or none.

Markets would readjust to expect zero or one move, real yields would rise, and the dollar would strengthen. Bitcoin would face a significant headwind. The strength of the dollar negatively impacts Bitcoin returns, and the lack of anticipated easing would exert pressure on cryptocurrency prices by raising the threshold for speculative assets.

In the dovish scenario, disinflation resumes, and growth softens. Core PCE for December and January would align with the 0.2% month-over-month trend observed since mid-2025, labor markets would show signs of weakness, and the Fed could “catch up” on cuts.

Three to five cuts, totaling 75 to 125 basis points, become realistic. Real yields would decline, the dollar would weaken, and risk appetite would recover.

Bitcoin would benefit from more accommodating financial conditions, although the initial trigger of growth weakness could induce a risk-off shock before the dovish repricing takes effect.

Scenario	Base	Hawk	Dove
Feb 20 core PCE signal (gate)	0.3%–0.4% m/m (sticky, not accelerating)	≥0.4% m/m and follow-through risk (services stays broad)	~0.2% m/m trend resumption + softer activity
2026 cuts (policy path)	~50 bps (≈2 cuts), starting June	0–25 bps (0–1 cut), “higher for longer”	75–125 bps (≈3–5 cuts), earlier/steeper easing
Real yields (10y TIPS) direction	Flat-high (stays elevated)	Higher (tightening via expectations)	Lower (policy + disinflation pull real rates down)
Dollar (DXY) direction	Firm (rate differential stays supportive)	Stronger (higher real-rate premium)	Softer (differentials compress, liquidity improves)
BTC bias	Choppy / range-bound (opportunity-cost drag offset by “not tightening”)	Headwind (higher hurdle rate + stronger USD)	Tailwind (easier conditions), but watch initial risk-off if growth cracks
What to watch next (2-week checklist)	Confirm: 10y real yields + DXY move together (or not). Validate: BTC stops making lower lows when yields stabilize. Risk: PCE revision risk (shutdown distortions).	Confirm: real yields make new highs and DXY breaks higher. Validate: BTC fails to reclaim key levels on bounces. Risk: “higher for longer” rhetoric hardens before/after Feb 20.	Confirm: real yields roll over and DXY softens. Validate: BTC strength persists beyond one-day relief. Risk: if dovishness = recession shock, BTC can wobble before repricing helps.

What changes for cryptocurrency positioning at this moment

The tactical consideration isn't whether to make a directional wager, but whether the post-PPI adjustment results in a lasting change in the macro factors that are significant for Bitcoin.

Two factors offer the clearest insights: real yields and the dollar.

Real yields on 10-year TIPS are approximately 1.90%, significantly above the sub-1% levels that characterized Bitcoin’s rally in 2020-2021. As long as real yields remain high, the opportunity cost of holding Bitcoin continues to be substantial.

The dollar index at 96.92 indicates global liquidity conditions. If the “higher for longer” scenario unfolds, the US dollar should appreciate as US real rates remain elevated.

If the dovish scenario comes to fruition, the dollar should depreciate as rate differentials narrow.

The clearest signal would be confirmation across both fronts. Real yields and the dollar moving in sync, followed by sustained weakness or strength in Bitcoin.

The price action on Jan. 30, with the dollar rising, yields increasing, and Bitcoin dropping to a two-month low, aligns with the hawkish repricing narrative, but one day’s performance does not establish a trend.

The upcoming two weeks before the Feb. 20 PCE release will determine whether markets adhere to that outlook or revert to a state of range-bound uncertainty.

December’s PPI elevates the stakes for the Feb. 20 PCE release.

If services inflation is as sticky as this report indicates, the Fed’s capacity to ease in 2026 diminishes significantly. Not because officials wish to maintain a restrictive stance, but because the data will not support it.

For Bitcoin, the critical question is not whether it can appreciate despite elevated real yields, as it has done previously. Rather, it is whether the baseline expectation for 2026 now assumes tighter-for-longer conditions as the standard.

The market is pricing in 52 basis points of cuts, but that represents a median expectation with considerable variability. The Fed controls the trigger, but inflation data will ultimately determine whether it is pulled twice, once, or not at all.

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