This morning, I listed two big headaches in the CPI report. Now, it’s the PPI’s turn.PPI Final Demand Services Month-Over-Month and Year-Over-YearJanuary FOMC MinutesJanuary 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-MonthServices Month-Over-Month2025-09: 0.62025-10: 0.22025-11: 0.32025-12: 0.62026-01: 0.82026:02: 0.42026-03: 0.22026-04: 1.2Services 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 ProductionPPI Percent Change Month-Over-Month by Stage of ProductionStage 1: 2.1 percentStage 2: 2.8 percentStage 3: 2.3 percentStage 4: 0.9 percentThose 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 TypePPI Intermediate Demand by Type Percent ChangeProcessed Goods: 2.7 percentUnprocessed Goods: 4.1 percentUnprocessed Food and Feed: 2.7 percentServices: 1.1 percentPPI Problem SynopsisPrice pressures are building in every stage of production.Price pressures are building in every key production typeThe 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 HeadachesEarlier today, I noted Two Reasons the CPI Report Will Give the Fed Severe HeadachesThere 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 DisasterInflation 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 OfficeIf 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.Original Post