A week’s worth of surprising economic data sent a pretty strong message to the market: Inflation that is higher than anticipated is likely to translate into higher interest rates as well. Just as economists had begun to talk up softer price increases, and in the shadow of Federal Reserve Chairman Jerome Powell’s pronouncements of “disinflation” taking hold, recent reports show that at the very least it’s going to be a long road. “We are listening to the signal from January inflation data, which suggest the disinflation process may be more prolonged than we previously believed,” wrote Michael Gapen, chief U.S. economist at Bank of America. The data surprises began two weeks ago when nonfarm payrolls surged by a stunning 517,000 in January , raising concerns that a resilient labor market could drive wages, and inflation, higher. Subsequent reports over the past week seemed to reinforce those concerns. The consumer price index , a closely watched inflation metric, jumped 0.5% in January, a bit more than expected. Then the producer price index , a measure of input costs at the wholesale level, rose 0.7% for the month, also higher than the estimate. Sandwiched between those releases was the monthly retail sales reading, which showed a robust 3% jump. The findings illustrated that even with rising inflation, consumer spending was more than keeping pace. “While the degree of [CPI] outperformance is small, the details suggested a firmer path of inflation, in our view, from less disinflationary support from core goods and more persistence from services and food inflation,” Gapen said. “Subsequent data on producer prices, however, surprised strongly to the upside.” What it means for the Fed That had multiple implications. First off, it made Wall Street generally expect a more hawkish Fed , or one that would be more inclined to raise rates higher than expected. Indeed, market pricing has shifted to a virtual certainty of at least a quarter percentage point rate increase at the March Fed meeting, and is now making room for the possibility of a half-point move. The probability for a 50 basis point hike is now 18.1%, double what it was a week ago, according to CME Group data . For the May meeting, futures contracts point to a near-certainty of another quarter-point move, and a 16.1% probability of a half-point increase that would take the fed funds rate to a target range of 5.25%-5.5%. That’s a solid quarter-point ahead of where markets had anticipated in recent weeks. Futures pricing points to a peak, or “terminal,” rate of 5.23%, according to the August 2023 fed funds futures contract. In line with that move, both Bank of America and Goldman Sachs have added another quarter-point move into their forecasts, agreeing with the futures market that the funds rate is headed to the 5.25%-5% range. Those moves also come following remarks from regional Fed presidents James Bullard of St. Louis and Loretta Mester of Cleveland, both of whom said they were pushing for bigger rate hikes at the last central bank meeting. Both are nonvoters on the rate-setting Federal Open Market Committee. Everything is on the table Goldman said in a client note Thursday that it was raising its rate forecast due to “stronger growth and firming inflation news.” Earlier in the week, the firm lowered its recession risk probability over the next 12 months to just 25%, and the Atlanta Fed’s GDPNow tool is now tracking real economic growth of 2.5% in the first quarter. Fixed income markets also have responded in kind to the shifting data and expectations. The 2-year Treasury note, considered the most sensitive to monetary policy, has risen nearly 15 basis points, or 0.15 percentage point, in February and is up 0.37 percentage point year to date, as of midday Friday. Credit Suisse economists don’t see rates heading quite as high as others, but noted upside risks to their forecast of a 5%-5.25% terminal range. “CPI inflation was close to expectations, but the details included concerning signs of persistent inflation, and a revision to seasonal adjustments made the Q4 slowdown appear less impressive,” Credit Suisse chief economist Ray Farris said in a note. “We expect core [personal consumption expenditures] inflation, the Fed’s preferred measure, rose even faster than CPI this month.” The personal consumption expenditure readings for January come Feb. 24 and could help solidify the Fed’s stance. Bank of America expects the headline reading to rise 0.6% for the month and 5.1% for the year, well above the 0.1% monthly gain in December and a notch above the 5% annual gain. On the core, which Fed officials tend to watch more closely, Bank of America sees a 0.5% monthly rise and 4.5% on a 12-month basis, compared to respective readings of 0.3% and 4.4% in December. Elevated readings like those could take the Fed from its newly cautious “quarter point at a time” focus into at least considering going back to something more aggressive. “The strong economic data should serve as a reminder for the market to remain cautious as the likelihood of further rate hikes increases,” said Tuan Nguyen, U.S. economist at RSM, who is cautioning “significant upside risk” to his forecast of a 5.25% funds rate by May. “Given that the Federal Reserve pays close attention to changes in economic conditions like those reported Thursday, all possibilities should remain on the table.”