Hot PPI Collides With a New Fed Era: Inflation Refuses to Cooperate as Warsh Steps In

The December Producer Price Index landed with an uncomfortable thud at 8:30 a.m. ET, complicating an already delicate policy moment just as President Trump moved to name Kevin Warsh as the next Federal Reserve chair. Headline PPI for final demand rose 0.5% month over month, more than double expectations, while prior months were revised to show a steady acceleration in underlying price pressures. At a time when markets are hoping for a glide path toward lower rates under new Fed leadership, the data instead reinforced a message the Fed has been struggling with for much of the past two years: inflation may no longer be surging, but it is proving stubbornly resistant to further cooling.

The composition of the report matters as much as the headline. The December increase in final demand prices was driven by services, which rose 0.7% on the month, the largest increase since July. Goods prices were flat, as declines in energy and food offset modest gains elsewhere. This split underscores a critical dynamic facing policymakers: the goods disinflation story that carried inflation lower in 2023 and early 2024 is largely played out, while services inflation remains the dominant and more persistent problem.

Within services, the most striking feature was the role of trade margins. Roughly two-thirds of the December increase in final demand services prices can be traced to a 1.7% jump in margins for final demand trade services, which measure the spread wholesalers and retailers earn rather than the sticker price of goods. In plain terms, December’s inflation pressure was driven less by rising input costs and more by firms widening markups. Machinery and equipment wholesaling alone accounted for more than 40% of the service-side increase, with margins jumping 4.5% in the month. Other contributors included guestroom rentals, food and alcohol retailing, health and beauty retail, portfolio management, and airline passenger services.

This margin-driven inflation is a double-edged sword for the Fed. On one hand, it is not classic cost-push inflation tied to wages, energy, or supply shocks, which tend to embed themselves more deeply. On the other hand, it signals that demand remains strong enough for firms to exercise pricing power. As long as consumers and businesses continue to absorb higher margins without pulling back, inflation can “mark time” at levels well above the Fed’s 2% target.

Core measures reinforce that concern. PPI excluding food, energy, and trade services rose 0.4% in December, marking the eighth consecutive monthly increase. On a year-over-year basis, final demand inflation held at 3.0%, while core PPI excluding food, energy, and trade services accelerated to 3.5% for 2025, essentially unchanged from 2024. That is not a picture of inflation converging comfortably toward target; it is a picture of inflation stuck.

Goods prices offered some relief, but not enough to change the narrative. Final demand goods were unchanged in December as sharp declines in diesel fuel, gasoline, and jet fuel offset increases in nonferrous metals, motor vehicles, residential natural gas, and aircraft equipment. Energy disinflation continues to act as a buffer, but it is increasingly doing the heavy lifting alone. If energy prices stabilize or rebound, the services-led inflation problem will become even more visible.

The timing of the report amplified its impact. As the data hit, Raphael Bostic was on CNBC reinforcing the Fed’s unease. Bostic argued that inflation remains “too high,” noted that it has been effectively stuck for two years, and warned that tariff-related price pressures have yet to fully filter through the economy. He emphasized that inflation is likely to “mark time” for much of the year and that the Fed does not need to be moving rates lower right now. While Bostic is set to step down in the coming months and his comments do not carry decisive policy weight, they neatly captured the institutional mindset confronting the Fed after this report.

That mindset is now intersecting with a potential regime change at the top of the central bank. Markets broadly expect Warsh, if confirmed, to favor lower policy rates over time, particularly as growth cools. However, Warsh is also viewed as more hawkish on balance sheet policy and less tolerant of inflation risks once they re-emerge. The December PPI report strengthens the case for patience rather than urgency. Even if the long-run destination for rates is closer to 3%, as Warsh and others have suggested, the path to get there is unlikely to be smooth if inflation refuses to cooperate.

Financial markets have already begun to reflect that tension. Treasury yields moved higher following the report, with the yield curve steepening as investors priced out near-term rate cuts. The dollar strengthened, while gold and silver sold off sharply, reflecting reduced expectations for aggressive liquidity support. Risk assets are being forced to reconcile two competing narratives: optimism around eventual easing under new Fed leadership, and data that argues the Fed’s job is not finished.

The key question coming out of this PPI report is persistence. Margin-driven inflation can fade if demand softens or competition intensifies, making this episode potentially more transitory than wage-driven pressure. But the consistency of core monthly gains and the breadth of service categories involved argue against dismissing the report as a one-off. If firms continue to protect margins in a resilient demand environment, inflation may remain sticky enough to keep the Fed sidelined longer than markets would like.

In that sense, December’s PPI did more than surprise on the upside—it reframed the policy debate at a critical moment. With Warsh poised to take the helm, inflation data like this will shape how much flexibility the Fed actually has. Lower rates may still be coming, but this report was a reminder that the inflation story is not done exerting pressure on sentiment, markets, or the central bank’s reaction function.