Well, that's not what the market ordered. Just as investors were getting comfortable with the idea of the Federal Reserve cutting interest rates sooner rather than later, a fresh inflation report showed price pressures might be a bit stickier than anyone hoped.

The Producer Price Index for January came in hotter than expected across the board on Friday. The headline number rose 0.5% from December, outpacing the 0.3% economists were looking for. On a yearly basis, it's up 2.9%, which is also above expectations.

But the real story is in the core number, which strips out the volatile food and energy categories. Core PPI jumped 0.8% for the month—that's the highest print since July 2025 and more than double what analysts had forecast. Year-over-year, core producer prices are up 3.6%.

So what's driving this? It's a classic case of good news and bad news. The bad news is services inflation. Final demand services surged 0.8% in January, the biggest gain in over a year. More than 20% of that increase came from a massive 14.4% jump in margins for professional and commercial equipment wholesaling.

The good news? Goods prices actually fell 0.3%, the largest drop since March 2025. Energy prices declined 2.7%, led by a 5.5% drop in gasoline. Nearly 80% of the decline in goods came from that gasoline price drop.

Think about it this way: inflation cooled where it tends to bounce around a lot (energy), but it heated up where it usually likes to stick around (services). That's exactly the kind of pattern that makes central bankers nervous.

And nervous they might be. Chris Zaccarelli, chief investment officer for Northlight Asset Management, said the report "could upset markets." He noted that over the past month, investors have been laser-focused on AI disruption and its potential impact on the labor market, pushing inflation concerns into the background.

"The latest inflation readings could give the Fed another reason to remain patient on rate cuts and potentially wait until the second half of the year before making changes," Zaccarelli said. He added that the hotter data adds another layer of concern within the traditional framework of price stability and full employment, even before accounting for AI's disruptive effects.

Markets certainly got the message. The S&P 500—as tracked by the SPDR S&P 500 ETF Trust (SPY)—opened 0.8% lower on Friday, heading for a negative weekly close. The Nasdaq 100 fell 1%, while the Dow Jones Industrial Average slipped 0.9%.

Shares of Nvidia Corp. (NVDA), the AI bellwether, sank nearly 2% after a 5.5% drop on Thursday. That puts the stock on track for its worst two-day decline since April 2025.

Meanwhile, in the commodity world, things were moving in different directions. Crude oil jumped 3.7% to around $67 per barrel, hovering near a seven-month high as rising tensions involving Iran injected fresh geopolitical risk into energy markets. Gold gained 0.8% to $5,250 per ounce, extending its recent run of strength. Silver spiked 4.5% to $92.

So here's where we stand: the inflation story just got more complicated. The Fed wants to cut rates, but data like this gives them every reason to wait. Markets want lower rates, but they might have to be patient. And everyone's favorite narrative—that AI will solve everything—just got a reality check from some old-fashioned economic data.