Services Push Wholesale Prices Up 0.5% in December

With input from Reuters, the Wall Street Journal, Market Watch, and Bloomberg.

US wholesale inflation picked up speed in December, but it wasn’t factories or raw materials doing the heavy lifting – it was services. The Bureau of Labor Statistics reported Friday that the Producer Price Index (PPI) for final demand rose 0.5% in December, the biggest monthly gain in five months and notably above economists’ expectations.

Quick snapshot: PPI +0.5% in December (largest gain since July); 12-month PPI +3.0%; goods prices flat; services jumped 0.7% with trade margins up 1.7%; hotel rooms +7.3%; airline fares +2.9%; energy -1.4%; food -0.3% (fresh/dry vegetables plunged 20.4%).

The surprise came from services – especially “trade services,” which capture wholesalers’ and retailers’ margins. Those margins shot up 1.7% and accounted for most of the monthly increase. Hotel and motel room prices and airline fares also spiked, boosting the overall services number.

Goods, by contrast, were flat in December. Energy prices dipped (gasoline was a drag), and food fell, driven in part by a massive month-over-month plunge in the cost of fresh and dry vegetables. But once you strip out food and energy, producer goods prices still climbed 0.4%.

A pickup in producer prices matters because it can feed through into consumer inflation. Some of the pressure reflects businesses trying to recoup higher costs pushed on by import tariffs – a theme economists have flagged all year. And if companies pass those higher wholesale costs on to consumers, it could keep the Federal Reserve on guard.

“The report validates the pivot of the Fed away from labor market risks back toward price stability,” Carl Weinberg of High Frequency Economics said, echoing the idea that the central bank is shifting focus back to inflation.

Fed officials left the policy rate untouched this week in the 3.50%–3.75% range, and Chair Jerome Powell himself has attributed some of the inflation overshoot to tariffs – though he expects tariff-driven price pressure to peak sometime in the middle quarters of the year.

Tariff impacts continue to show up unevenly.

“Tariff impacts continued to flow through producer costs unevenly in December,” said Ben Ayers, senior economist at Nationwide.

He noted that while broad tariff effects look muted overall, localized spikes – like those in trade margins seen in December – suggest firms are quietly trying to recoup higher production costs.

Some of the PPI components feed directly into the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index. Portfolio management fees, airline fares and hotel room costs all show up in the PCE calculations, meaning the PPI move could foreshadow stickier consumer inflation readings. Economists expect the December core PCE (due Feb. 20) to show some continued push, possibly translating to roughly a 3.0% year-on-year reading – still above the Fed’s 2% target.

Wall Street didn’t love the number: stocks opened lower while the dollar nudged higher and Treasury yields ticked up. Higher wholesale prices make investors worry that rate cuts could come later or be smaller than hoped.

December’s PPI report is a reminder that the inflation story isn’t over – even if the headline numbers look moderate. With services – and retailers’ margins in particular – doing the heavy lifting, the risk is that higher producer costs make their way onto consumer bills. Tariffs are part of the story, but so are travel and hospitality prices, and the mix means the Fed will be watching the next batch of inflation data closely.