The PPI miss feels bullish on the surface because the headline number (+0.5% MoM, +4.0% YoY) came in below the high expectations that baked in a bigger energy spike from the Iran war. Markets popped short-term, treating it as “not as bad as feared. “Here is exactly why it is bearish on the level that actually matters for stocks and the Fed: The “miss” happened almost entirely because energy prices surged 8.5% MoM (gasoline +15.7%, diesel and jet fuel even more). That volatile component drove the entire goods-side advance. Strip it out, and the rest of the report shows no relief: Core PPI (ex-food and energy) held steady at +3.8% YoY — the highest since early 2023, with a +0.2% MoM print that was not cooling.
Final demand goods ex-food/energy still rose +0.2%.
Services prices were unchanged but remain sticky from prior months.
Food prices actually declined slightly, which helped the headline look softer.
This is the classic pass-through lag. Producers faced massive upstream cost shocks from energy and logistics tied to the war. Many absorbed the hit in thinner margins rather than immediately raising selling prices across the board. That absorption created the softer headline “miss.”
But those higher input costs do not vanish. They sit on corporate balance sheets and will eventually flow through to final consumer prices (CPI) and services in the coming months especially if energy stays elevated or normalizes slowly (Strait of Hormuz disruptions are not fixed overnight). The Fed watches core and underlying measures precisely because headline volatility from energy can mask this.
Result: the Fed cannot pivot to easier policy. Inflation is not convincingly disinflating. Rate cuts get pushed further out (or paused entirely if fresh shocks hit), keeping borrowing costs high. That crushes equity valuations, especially growth stocks that rely on cheap money. Corporate margins stay squeezed as costs eventually pass through.