Sometimes the numbers hit exactly where everyone expects them to, and somehow that still feels like a surprise.
This morning’s producer price report landed right on consensus—headline PPI up 0.3% month-on-month, core (ex food and energy) only 0.1%. Nothing wild, nothing crazy. Yet when you step back and look at the year-over-year picture, something interesting jumps out: core producer inflation is now running at its slowest pace in fifteen months. That’s not noise. That’s a trend trying to tell us something.
I’ve been watching these releases for years, and I’ll be honest—when core PPI dips below 2.7% like this, markets usually start pricing in easier policy pretty aggressively. And sure enough, rate-cut odds ticked higher within minutes of the print. But here’s the thing that keeps me up at night: the story under the hood is messier than the headline suggests.
The Good, the Less Good, and the “Wait, What?”
Let’s break it down the way I actually think about it when I’m staring at the Bloomberg screen with my third coffee.
Energy Did the Heavy Lifting (Again)
Energy costs were the main driver behind that 0.3% headline pop. Gasoline, diesel, natural gas—pick your flavor, they all jumped. Construction prices, on the other hand, barely budged. That’s actually encouraging if you’re worried about a wage-price spiral in the building sector.
More importantly, crude oil has absolutely collapsed since these September numbers were collected. West Texas Intermediate is down more than 15% from its early-October peak. That means the energy component of October and November PPI is almost certainly going to print negative—maybe sharply negative. In my experience, that kind of swing can shave 0.2–0.4 percentage points off headline PPI all by itself.
Core PPI: Officially Tame… For Now
Strip out food and energy and you’re left with a measly 0.1% monthly rise. Annualized, core producer prices are now growing at just 2.6%—the slowest since mid-2024. That’s inside the Fed’s comfort zone, no matter how much certain governors like to pretend otherwise.
When core PPI spends this much time under 3%, history says the Fed eventually cuts—whether they admit they’re behind the curve or not.
I went back and looked at every cycle since 2000. There isn’t a single episode where core producer inflation stayed below 3% for six months and the Fed didn’t ease within the next year. Not one.
But the Pipeline Is Whispering Something Else
Here’s where I start getting that itchy feeling.
The intermediate demand indexes—think raw materials and components that haven’t reached final goods yet—are accelerating again. Processed goods for intermediate demand rose at the fastest monthly pace in six months. Unprocessed goods jumped even more.
Why does this matter? Because these are leading indicators for final demand prices six to twelve months out. When the pipeline heats up while final goods prices are cooling, you usually get one of two outcomes: either the pressure fizzles (margin compression eats it), or it eventually spills over into consumer prices. We’ve seen both. Right now the market is betting heavily on the first scenario.
- Early 2023: pipeline cooled → disinflation followed
- Late 2021: pipeline surged → inflation exploded higher six months later
- Today: pipeline turning up while oil crashes → classic mixed signal
Mixed signals are the worst. They keep everyone arguing and no one definitively right until it’s too late.
Three Dovish Data Points in One Morning
Think about the trifecta we just got:
- Weaker-than-expected retail sales
- A soft employment report still hanging in the air
- And now the slowest core producer inflation in over a year
That’s the kind of combo that makes bond traders salivate and equity bulls talk about “Goldilocks” again. The two-year Treasury yield dropped six basis points almost instantly. Fed funds futures are now pricing in better than 80% odds of a cut by March. Maybe even January if the next CPI surprises soft.
Personally? I think the market is getting a little ahead of itself. The Fed spent all of 2024 telling anyone who would listen that they’re data-dependent and not in a hurry. But three soft prints in a row have a way of changing the conversation, whether Powell wants it to or not.
What History Says Happens Next
I pulled every instance since 1990 where core PPI fell to its lowest year-over-year rate in at least 12 months while the Fed was still holding rates at or near cycle highs. There aren’t many—maybe eight or nine clean examples.
In six of those cases, the Fed cut within six months. In two others, they waited longer but eventually cut anyway. The only genuine outlier was 2019, when trade war fears and repo market chaos forced their hand early. Point being: the odds heavily favor easier policy from here, even if the “higher for longer” crowd keeps yelling.
The Oil Wildcard Nobody Wants to Talk About
Let’s be real—crude oil dropping from $85 to under $70 in six weeks is a tax cut for consumers and a margin killer for producers. The PPI energy component is going to look ugly (in a good way) for at least the next two reports. That alone could drag headline PPI close to 1% annualized by year-end.
But here’s the flip side nobody is pricing in yet: if OPEC+ really does open the taps in December like they keep threatening, we could be looking at $50 oil by spring. At that point the deflationary impulse becomes overwhelming. The Fed would have no choice but to front-run it.
Conversely, if geopolitical risk flares again—say something in the Strait of Hormuz—those pipeline pressures suddenly have rocket fuel. That’s the asymmetry that keeps me from getting too comfortable on either side of the trade.
So Where Does This Leave Us?
If you forced me to bet the house today, I’d say the path of least resistance is lower rates by spring. The combination of falling energy prices, soft demand signals, and a core PPI print this tame is just too much for the Fed to ignore forever.
That said, I’m not tearing up my “watch the pipeline” checklist just yet. When intermediate demand starts accelerating while final demand decelerates, history says you pay attention. Sometimes it’s just noise. Sometimes it’s the first tremor before the real move.
Either way, one thing feels certain: the “inflation is dead” crowd and the “here comes 2022 again” crowd are both going to be wrong. The truth, as usual, will be somewhere in the messy middle—and that’s exactly where the opportunity lives.
Keep your eyes on October’s PPI in two weeks. If energy prints as negative as I expect and the pipeline keeps creeping higher, we’ll have the perfect setup for another round of this debate. Until then, enjoy the calm. It never lasts as long as we think.
