The PPI is the inflation reading that matters for understanding what is coming in the pipeline, because producer prices today tend to become consumer prices over the following one to three months. March was measured during the worst of the oil shock, when WTI briefly topped $117 per barrel, so the headline figure in isolation is not surprising.
What is more telling is the split between goods and services within the report. The goods component, where energy costs show up most directly, drove the bulk of the headline increase. Services PPI, which tends to be stickier and more reflective of underlying wage and demand dynamics, was more contained. That mirrors the pattern seen in last Friday's CPI report, where headline inflation surged 0.9% on energy but core held at just 0.2%. We broke down that inflation split in detail in our macro post on the Fed's impossible position.
The two data points together are building a coherent picture: the Iran war created a sharp, energy-driven inflation spike that has not yet significantly contaminated the underlying price structure of the economy. The operative word is yet. Oil prices at $95 and above do not produce their full inflationary effect instantly. They work through supply chains and transportation networks over weeks and months.
The Fed meets again on April 28 and 29. Markets are now pricing in no change to the federal funds rate, which sits at 3.50% to 3.75%. The probability of a hike by year-end has fallen back below 10% following the ceasefire and the soft PPI. The probability of a cut by December has recovered to around 40%. The macro picture is moving in the right direction. The question is whether it is moving fast enough.
