December’s producer price index not only beat expectations, but also revealed deep-rooted issues that will force the market to rethink the entire 2026 interest rate path.
Final demand PPI rose 0.5% month-on-month, the biggest increase since July, but this was almost entirely due to a 0.7% rise in services, while commodity prices were flat. The headline figure was 3.0% year-on-year, higher than the expected 2.7%, but core PPI rose from 2.9% to 3.3%, the highest level since July 2025.
The market sold this news immediately. Bitcoin tried to recover from the intraday low of $81,100 and fell below the $82,400 zone. Meanwhile, federal funds futures have reset the rate cut for all of 2026 to just 52 basis points, with the first quarterly point move now pegged at June.
The dollar index is up 0.82% in the past 24 hours, and the real yield on 10-year TIPS is nearly 1.90%.
This begs the question: Does this confirm that disinflation is stuck in the very services sector that the Fed cannot ignore? Pricing power has become more rigid in the services sector, and margins are widening rather than shrinking.
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What actually got hot and why it matters
The December report revealed sustained pricing power rather than a temporary shock.
Trade services margins (the difference between what wholesalers and retailers pay and what they invoice) rose 1.7%. Portfolio management fees rose 2.0%, airfares rose 2.9% and hotel room numbers rose 7.3%.
These are categories that are not driven by volatile commodity prices, but rather areas where companies can better pass costs on to end users.
Energy fell 1.4%, which would normally drag down the headlines. Rather, the strength of the service overwhelmed it. Even excluding trade, transportation and warehousing, services still rose 0.3%.
The bureau’s narrowest core metric rose 0.4% for the eighth month in a row, and was up 3.5% from a year earlier.
The fact that the stickiest subset of PPI has been rising for eight consecutive months argues against dismissing this as noise. Trade gains could quickly reverse if demand weakens, but the broader services print results suggest that companies maintain pricing power across multiple categories.
This is the inflation the Fed targets when it talks about the “last mile” problem.
PPI to PCE Bridge and Gate on February 20th
Producer prices do not directly determine monetary policy, as the Fed monitors consumer spending inflation, which will be announced on February 20th. However, the PPI components are mechanically incorporated into the PCE calculation.
Portfolio management, airfare and accommodation costs all appear as inputs to core PCE, meaning December’s hot PPI creates an uptrend in the print market that will come under scrutiny three weeks later.
Economists currently estimate December core PCE to be between 0.3% and 0.4% month-on-month, which would imply a year-on-year increase of around 3.0%.
According to the Cleveland Fed’s Nowcast, core PCE in January 2026 is about 2.76% compared to the previous year. This is still above the Federal Reserve’s 2% target, but it won’t accelerate to the mid-3% range immediately, which would prompt a hawkish shift.
Because the government shutdown disrupted data collection, BEA needed to approximate the missing CPI inputs in the October PCE report. The risk of revision is higher than usual, and the first printing on February 20th may not be the final version.
Markets hate ambiguity, and ambiguity over the Fed’s preferred inflation measure keeps real yields rising and risk assets volatile.
What the market believes now
As of Jan. 30, federal funds futures were pricing in about 52 basis points of rate cuts for all of 2026, with two quarterly point moves, with the first likely in June. The market puts the probability of a rate cut in March or April at less than 30%, and the probability of a rate cut in June at about 65%.
Compare this with the Fed’s December economic forecast summary. The median participant sees the policy rate ending in 2026 at 3.375%, about one notch lower than the current range of 3.50% to 3.75%.
The Congressional Budget Office (CBO) predicted that the policy rate would remain at about 3.4% by the fourth quarter of 2026, and that inflation would remain above 2% for many years due to tariffs and tax cuts and remain flat until 2028.
Markets are pricing in slightly more easing than the Fed’s median, but much less than the “normalization” path some had hoped for.
CBO’s projections suggest that even modest easing will not cause inflation to cooperate. Interest rates stay high for a long time not because the Fed is hawkish, but because the economy doesn’t produce the disinflation needed to justify deep rate cuts.
Three scenarios regarding rates and Bitcoin
The base case for interest rates and Bitcoin consists of two rate cuts starting in June.
The PCE on February 20 was around 0.3-0.4% compared to the previous month, confirming that inflation is sticky but not accelerating. The Fed has cut rates twice by about 50 basis points (bp), keeping policy restrictive enough to contain inflation without hurting growth.
In the case of Bitcoin, this corresponds to a state of instability. Rising real yields and a strong dollar create opportunity cost resistance, but the glide path of two rate cuts has not fully tightened.
For those who are hawkish, “the price will rise in the long run.” Core PCE on February 20th was 0.4% compared to the previous month, and the momentum continues in subsequent months. Services inflation remains broad-based, and the Fed will either cut rates once or not at all.
The market recuts toward a zero or one move, real yields rise, and the dollar strengthens. Bitcoin faces clear headwinds. A strong dollar is negatively correlated with Bitcoin returns, and the absence of the expected easing will increase hurdle rates for speculative assets, putting pressure on crypto prices.
In the dovish case, disinflation will resume and growth will slow. Core PCE in December and January was close to the 0.2% month-on-month trend from mid-2025, showing cracks in the labor market and allowing the Fed to “catch up” with cuts.
Interest rate cuts of 3-5 basis points and 75-125 basis points are becoming more likely. Real yields fall, the dollar weakens, and risk appetite recovers.
Bitcoin will benefit from easing financial conditions, but an initial slowdown in growth could trigger a risk-off shock before dovish repricing takes hold.
| scenario | base | hawk | pigeon |
|---|---|---|---|
| February 20 Core PCE Signal (Gate) | 0.3% to 0.4% compared to the previous month (sticky, doesn’t accelerate) | ≥0.4% Previous month/Previous month and follow-through risk (scope of services remains broad) | ~0.2% m/m Resume trend + slowdown in activity |
| Reduction in 2026 (policy direction) | ~50 bps (about 2 cuts), start June | 0~25bps (0–1 cut), “longer” | 75 to 125 bps (approximately 3-5 cuts), faster/steeper relief |
| Direction of real yield (10-year TIPS) | flat high (remains elevated) | higher (Tightening due to expectations) | lower (Policy + disinflation lowers real interest rates) |
| Dollar (DXY) direction | hard (Interest rate differential continues to support) | become stronger (Insurance premium with high real interest rate) | softer (Compression of difference, improvement of liquidity) |
| BTC bias | choppy/limited range (Offsetting opportunity cost resistance by “not tightening”) | Headwind (increase in hurdle rate + stronger US dollar) | Tailwind (simpler condition), However, if there are cracks in growth, be careful of initial risk-off. |
| What to watch next (2 week checklist) | confirm: 10-year real yield + DXY movement together (or not). verification: Once yields stabilize, BTC will stop making lows. risk: PCE revision risk (shutdown distortion). | confirm: Real yield hits new high and DXY becomes even more popular. verification: BTC cannot regain key levels upon bounce. risk: Around February 20th, the “longer” rhetoric solidifies. | confirm: Real yields roll over and DXY becomes softer. verification: BTC’s strength persists beyond the one-day easing. risk: Dovish = In case of a recessionary shock, BTC could wobble before the repricing takes effect. |
What will change in virtual currency positioning now?
The tactical question is not whether to make a directional bet, but whether the post-PPI repricing will create a lasting change in the macro dial that matters for Bitcoin.
Two variables provide the clearest reading: real yields and the dollar.
The real yield on 10-year TIPS is approximately 1.90%, well above the sub-1% levels that were prevalent during the 2020-2021 Bitcoin rally. As long as real yields are high, the opportunity cost of holding Bitcoin remains high.
The dollar index was 96.92, reflecting the global liquidity situation. If the “longer-term rise” continues, US real interest rates will remain high and the US dollar should appreciate.
If the dovish scenario materializes, the dollar should weaken as interest rate differentials narrow.
The cleanest signal is confirmation of both. Real yields and the dollar move in tandem, and then Bitcoin’s weakness and strength persist.
The January 30 price movement of a rising dollar, rising yields, and Bitcoin falling to a two-month low is consistent with the hawkish repricing narrative, but trends don’t just happen one day.
The next two weeks leading up to PCE’s announcement on February 20th will show whether the market supports that view or reverts to range-bound uncertainty.
December PPI raises stakes for February 20th PCE announcement.
If services inflation proves to be as persistent as this report suggests, the Fed’s chances of easing in 2026 will be significantly narrowed. Not because authorities want to keep restrictions in place, but because the data doesn’t cooperate.
The question for Bitcoin is not whether it can rise even as real yields rise, as it has so far. The question is whether the base scenario for 2026 assumes a longer-term and more difficult situation as the default.
The market is pricing in a 52 basis point rate cut, which is a wide range of median expectations. The Fed is holding the trigger, but inflation data will determine whether it pulls twice, once, or not at all.
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