While the Federal Reserve has been seemingly inching towards the conclusion of its rate hikes, recent data may have put an end to the growing dovish narrative. Indeed, with jobs and inflation coming out hotter than expected, some believe the Fed rate hikes are destined for a return to form.

Despite the central bank’s best efforts, inflation remains elevated. The Labor Department reported last week that the Consumer Price Index (CPI) rose 0.5% in January, the biggest jump since October. This reflects annual inflation of 6.4%, both higher than projections and increasingly far from the Fed’s 2% goal. Food prices made up much of this inflation, up 10% from the same time last year, as well as Shelter prices, up 7.9%.

The Fed has long been devoted to lowering prices, regardless of growing economic pains. With inflation proving stubbornly sticky, analysts have seemingly adjusted their projections. Some have speculated the Fed will raise its terminal federal funds rate as high as 6%–and keep it elevated for longer than expected. Currently, the effective benchmark rate is around 4.58%.

Former Treasury Secretary Larry Summers has repeatedly commented on the Fed’s rocky path forward. Currently, Summers is part of the “return to 50,” crowd. That is, Summers believes the Fed may be forced to return to 50 basis-point rate hikes, a reverse from its milder 25 bps hike last month.

“It raises the possibility that we’re not landing at a terminal rate sometime in the next several months, or that we’re going to have to go back to hitting the brakes harder by more than 25 basis points… Once you’re sure that a move is necessary. I don’t think there’s any great advantage to delaying that move.”

The Case for More Fed Rate Hikes

At its last meeting, the Fed reiterated its current plans for “a couple” more rate hikes this year. Reasonably so, with inflation proving stubborn, the economy may need further tightening to achieve the Fed’s lofty inflation goals. In that regard, last month’s jobs report only strengthened the case for the central bank’s hawkish agenda.

The U.S. economy added 517,00 nonfarm payrolls in January, almost triple the 170,000 projected jobs. This reflects an unemployment rate of just 3.4%, the lowest level since 1969. While it may seem counterintuitive, this is a strong sign the Fed’s tightening mission is far from over. Despite this historical precedent, currently, many economists are actually hoping for unemployment to deteriorate.

Inflation is fundamentally an issue of supply and demand. As the government pumped stimulus spending into the economy following the start of the Covid-19 pandemic, inflation was a natural consequence. This influx of cash created an environment of artificially elevated demand that kept the U.S. economy afloat. Currently, however, the goal has reversed.

By repeatedly raising interest rates, the central bank is essentially attempting to reign in aggregate demand to a point where prices fall. Unfortunately, unemployment is a glaring reflection of aggregate demand. Hiring needs to slow down dramatically before any real improvements to inflation can truly be felt. At least, that’s the basic economic theory.

“My own view would be that you’re not going to have a — you know, a sustainable return to 2 percent inflation in that sector without a better balance in the labor market,” Fed Chair Jerome Powell said earlier this month. “And I don’t know what that will require in terms of increased unemployment.”

Is Disinflation Already Under Way?

Now the counterargument is both tried and arguably true. By all accounts, 6.4% inflation is a notable improvement from the 9% peak last summer. Why not just hold tight and let the rate hikes work their way through the economy? Well, for one, most of the disinflation felt so far has had little to do with macroeconomic tightening.

Indeed most of the deflation has been related to energy prices, namely oil, which skyrocketed when the Ukraine-Russia war first began. Since then, President Joe Biden has released 180 million barrels of oil from the strategic oil reserve, pushing energy prices down across the board.

Make no mistake, lower prices at the pump are a win for just about everyone. Unfortunately, this doesn’t exactly mean the Fed’s rate hikes are having their intended effect.

Core inflation, which excludes more volatile, globally-impacted categories like Food and Energy, has made notably less progress than headline inflation would suggest. On an annual basis, as per the January CPI, core inflation is only down about 0.4%, from 6% in January 2022 to its current 5.6% level. This is pretty clear evidence that prices haven’t quite conformed to the Fed’s rate hikes in the way some analysts believe.

According to investment banking giant, Morgan Stanley, January’s sticky core inflation isn’t necessarily a cause for panic:

“Core inflation should move higher again in January as core goods deflation takes a pause and methodological changes boost the housing component… Updated index weights could inject additional volatility, but we see the path to disinflation intact beyond January.”

Is a 50 BPs Fed Rate Hike the Answer?

Rumors have never been louder that the Fed will return to its previous rate hike sizing of 50 basis points. Indeed, as Summers stated, if the central bank is planning on raising the benchmark rate by 50 bps eventually anyways, there’s little reason to pull its punches given the stubborn state of the CPI and related economic indicators.

However, according to Sumit Handa, Managing Director at Pennington Partners, the CPI alone isn’t reason enough for the Fed to turn up the heat — even if it will anyways.

“It is certainly possible that the Federal Reserve raises rates by 50 basis points at the next meeting. However, remember that the CPI is a lagging indicator, not a leading one. Thus, relying on past numbers is not necessarily accurate and/or indicative on inflation. Further, monthly fluctuations are bound to occur and should not be the basis for a decision by Fed Governors, investors and analysts.”

On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.