U.S. consumer prices rose last month by a bigger-than-expected amount in a surprise development that jolted expectations of the economy and could induce investors to further adjust predictions for interest rate cuts, which now might be pushed back to September.

However, a report from the Bureau of Labor Statistics did point to a 2% year-on-year increase in producer prices, further suggesting that inflationary pressures remained pronounced, just as many—including the Fed—had suggested some time back.

This increase means that consumers are likely to feel the pinch of higher prices, as businesses pass on the bulk of higher costs to them.

Meanwhile, the core producer price index, which excludes food and energy, was also up a solid 0.3% from last month. This sustained increase signals continuing underlying inflation that could restrain consumer spending, a mainstay of U.S. economic health. Investors have seen plenty to make them think that this would be followed by a slowdown in inflation and a midyear cut in the rate; they now have plenty to rethink.

The leap in consumer prices, unanticipated by most, changes those market dynamics that will set many up for going into the report not looking for a reduction in the rates until, perhaps, September. It was viewed as a cautious move by the Federal Reserve. They want to be certain there is strong evidence to suggest that inflation subsides before cutting rates.

The financial markets reacted promptly to the news, with the yields on 10-year U.S. Treasury notes surging. The rising yields, indicating further growth of concerns from investors, point to the Federal Reserve finding itself under compulsion to keep the monetary policy in a restrictive mode longer than anticipated to fight against inflation.

And, most worryingly, the data also showed that higher prices were being recorded for producers—this poses a bigger headache, signaling that inflation is a problem not only of its transitory effects but of something that has deeper roots. One of the main, therefore, dogged problems with the supply chain has been the cost pressures. These issues include logistical delays and shortages of key materials, contributing to the upward pressure on prices.

Energy prices have also played a crucial role in the inflation narrative.

Recent spikes in energy prices have increased the costs along the value chain and hence through all the sectors, which contribute to the overall increase in the producer prices. The general trajectory of energy prices, though with some fluctuation, indicates sustained high levels and points to complicacy in the inflation outlook. How the Fed responds to this situation will be key in how economic conditions evolve from here. The central bank had signaled an openness toward rate cuts if inflation metrics improved, and the latest data could nudge altering these plans.

Investors are going to be following the comments put on that trail very closely by the Fed and the policies thereafter for economic growth and hints of interest rates.

It further had a manifest impact on the stock market, with major indices showing a rise in volatility to the inflation data. Meanwhile, investors will continue recalibrating their portfolios to lower the risk profile and stay particularly cautious in sectors sensitive to changes in interest rates, such as real estate and consumer discretionary. The market will take some time to digest this information, but the first signs of the general economic impact begin to show. A rate cut delay results in higher financing costs that might curb investment and spending, thus reducing prospects of economic growth.

Consumers are already dealing with high prices; any higher and it could push consumers to limit their spending; slowing the economy. As a result, the unexpected surge in consumer prices has set off a chain reaction in the financial markets, with investors now bracing for a more extended period of high-interest rates. The next steps by the Federal Reserve could tip the balance in the key decisions affecting the economic landscape between the efforts of reigning in runaway inflation and the need to support growth.

It will all be eyes on the Fed as market participants find their way into the woods of these extremely low market years.