The Fed badly needs inflation to happen soon

Inflation to continue to stay low: Yellen

If the Fed's efforts to normalize policy and show that it was right all along are to have a happy ending, it will need one thing: inflation.

That's been an elusive feature of the economy so far, at least according to the gauges U.S. central bank officials like to use. Inflation has been even harder to come by recently, with a year's worth of lackluster readings hampering policy.

Wednesday brought some good news on that front, with the producer price index registering a 0.1 percent gain that, while meager, topped Wall Street expectations for a 0.2 percent drop. The market next will focus on data Friday, when the core consumer price index is expected to register a 0.2 percent increase that would translate into a 2.1 percent annualized gain excluding food and energy. The headline measure is projected to decline 0.1 percent.

Read More $12.3 trillion of QE has added up to...this?

The trend would get the Fed closer to its 2 percent target and give it some breathing room for additional rate hikes. However, the market does not expect that to happen.

Traders have been pricing in a declining chance of future rate increases. A tool the CME uses to gauge rate hike probability indicates no chance until at least February 2017, while the fed funds futures contract shows no additional moves priced in until December 2017.