This morning, I listed two big headaches in the CPI report. Now, it’s the PPI’s turn.
January FOMC Minutes
January 27-28 Minutes: Participants observed that overall inflation had eased significantly from its highs in 2022 but remained somewhat elevated relative to the Committee’s 2 percent longer-run goal. Participants generally noted that these elevated readings largely reflected inflation in core goods, which appeared to have been boosted by the effects of tariff increases. In contrast to prices for core goods, some participants commented that disinflation appeared to be continuing for core services, particularly for housing services.
Regarding the outlook for inflation, participants anticipated that inflation would move down toward the Committee’s 2 percent objective, though the pace and timing of this decline remained uncertain. Participants generally expected that the effects of tariffs on core goods prices would likely start to diminish this year. Several participants remarked that the ongoing moderation in inflation for housing services was likely to continue to exert downward pressure on overall inflation.
The Fed was wrong in January in more ways than one.
PPI Final Demand Month-Over-Month
Services Month-Over-Month
- 2025-09: 0.6
- 2025-10: 0.2
- 2025-11: 0.3
- 2025-12: 0.6
- 2026-01: 0.8
- 2026:02: 0.4
- 2026-03: 0.2
- 2026-04: 1.2
Services turned up before the war in Iran started. January through March of 2026 were all hot. April was a disaster.
As of December 2025, services were 68.3 percent of the PPI.
That’s Fed problem #1 for the PPI. Intermediate demand is problem number #2.
PPI Intermediate Demand by Stage of Production
PPI Percent Change Month-Over-Month by Stage of Production
- Stage 1: 2.1 percent
- Stage 2: 2.8 percent
- Stage 3: 2.3 percent
- Stage 4: 0.9 percent
Those numbers are stacked up waiting to hit final demand numbers.
Stage 1 (Earliest Stage)
- Definition: Comprises intermediate goods and services that are in the earliest stages of processing. These are inputs used by industries to create goods for Stage 2 or 3.
- Examples: Raw agricultural products, crude energy materials, and basic chemicals.
Stage 2 (Intermediate Stage)
- Definition: Consists of intermediate goods and services that have undergone initial processing and are used to produce Stage 3 or 4 goods/services.
- Examples: Intermediate energy products, chemical components, and industrial materials.
Stage 3 (Advanced Intermediate Stage)
- Definition: Represents advanced intermediate goods and services, which are largely processed and are frequently used in the final production stages.
- Examples: Components for manufacturing, processed materials, and advanced service inputs.
Stage 4 (Closest to Final Demand)
- Definition: Composed of goods and services that are closest to final demand, meaning they are almost ready to be sold to the final user (consumers, government, or for capital investment).
- Examples: Finished goods and services, such as final manufactured machinery or retail services.
PPI Intermediate Demand by Type
PPI Intermediate Demand by Type Percent Change
- Processed Goods: 2.7 percent
- Unprocessed Goods: 4.1 percent
- Unprocessed Food and Feed: 2.7 percent
- Services: 1.1 percent
PPI Problem Synopsis
- Price pressures are building in every stage of production.
- Price pressures are building in every key production type
- The year-over-year disinflation in services inflation ended in October of 2025.
- Services inflation month-over-month and year-over-year are both headed up.
- Disinflation in unprocessed food and feed is over.
- overall PPI acceleration started in December before the war in Iran. So, this is not all war related.
My two key Fed headaches are services which account for 68.3 percent of the PPI, and pent-up inflationary pressures at the intermediate level.
For more on PPI for final demand, please see Producer Price Index PPI Surges 1.4 Percent in April, Fed Behind the Curve?
The PPI numbers exceeded the highest estimate of every economist surveyed.
Worst of all, this is unrelated to shelter inflation in the CPI which accounts for over 35 percent of the CPI.
The CPI Report Will Give the Fed Severe Headaches
Earlier today, I noted Two Reasons the CPI Report Will Give the Fed Severe Headaches
There are two very troubling aspects of the latest BLS CPI report. Did you spot them?
Also see CPI Hotter than Expected, Highest in Three Years, a Genuine Disaster
Inflation in April was another scorcher. Here are some month-over-month and year-over-year charts.
Finally, please note Real Hourly Earnings Decline Again, No Growth Since Trump Took Office
If it feels like you are not getting ahead, it’s because you aren’t. Six charts.
If the strait stays closed much longer we are going to do serious damage to the entire global economy.
The stock market acceleration in the face of the inflation reports is interesting for sure. And it all skyrocketed when trump surrendered (ceasefire) and it was clear inflation was coming.
Not the usual discounting behavior when higher rates are expected, but investors running scared of inflation. But then the market has been broken for a while now so who knows…
Could it be that we are entering the last burst before a mess. I keep reading that the big boys are loading up on bonds, convinced this ends in recession.
Interesting times
Almost all the hand wringing adjustments over our economic mess has its roots in inflation. The feds congressionally mandated function is stable prices which they self-interpret as 2% inflation target which they have not met in who knows how long. Congress has spent beyond its revenues since the commencement of the Viet Nam War and President Johnson’s Great Society Programs in the late 1960’s. If a dollar continued to be held to constant value there would be no need for inflation protection in any government program or wages public and private, etc. cost savings would be huge. It is a problem of our own making and will likely be root cause of our downfall, initiated from within, not from outside.
Why would Iran open the strait? They’ll keep it closed until we have a bond market event. They have to, to establish deterrence. There’s no scenario where they let us off the hook without an economic crisis. The war isn’t over. The ceasefire was essentially our surrender. It’s been great for Iran because they can keep the strait closed without having to put up with our bombs. The war is the strait being closed. If Iran can establish precedent that attacking Iran = market collapse, then no US President will ever attack Iran again. That is priceless. They will endure whatever it takes to achieve that. That’s why every dumbass analyst who thinks it’s over or thinks there’s any way out of this without a market crash is a pumpkin. The market either doesn’t understand, or it’s government intervention as the government thinks it can foil Iran’s plans by pumping up markets. Can’t have a bond market crisis if markets don’t go down now can you? and the Fed and treasury certainly have the power to do it. They made the market go up during a worldwide plague. They can do it again. Only everyone will probably wish we had a market crash instead of what we’re gonna get. Because the sooner we get a bond market crisis that makes wallstreet turn on Trump, the sooner Iran actually does open the strait. If Trump tries to prop markets up long enough to make it to the midterms, that means the strait will be closed that entire time and the shortage will be enormous. We’re cooked ladies and gentlemen.
Wouldn’t the Americans just beat JDAMs into plowshares?
I hate to say this but we were cooked long before this point.
It took both republicans and democrats to get us to where we are today: no room for the unexpected. They ran deficits higher than taxes coming in for 80 years or more. This this isn’t something that’s suddenly happening.
What is suddenly happening though is the world calling America on its debt, its hypocrisy, and its loyalty. It’s why confidence in America foreign or domestic is dropping like a rock, and Trump isn’t helping the situation.
As the old saying goes, “it works till it doesn’t.” There’s no way out but to survive the pain now, that is if one can survive.
It’s funny, I can remember the second Clinton term when the federal government actually ran surpluses for 4 straight years. Who would of thought that those would be the good old days? I remember serious business press articles that were worried about how asset pricing models would work when all US treasuries were retired and there was no “risk-free” asset to use. Then came the Bush tax cuts, 9/11 with the wars in Afghanistan and Iraq, the dot.com implosion, etc, etc. and it has been all down hill since then.
And Fox News was all over Clinton for a consensual blowjob.
Now Fox protects serial pedophiles…
Follow the money!