Surging Services Costs Spark Unexpected Surge In US Producer Prices In January

US Producer Prices came in hotter than expected in January, with the headline PPI rising 0.5% MoM (vs +0.3% exp), higher than the revised +0.4% MoM in December. This left Producer Prices up 2.9% YoY (hotter than expected but below December’s +3.0%)…

Source: Bloomberg

Under the hood, we see a surge in Services costs (not tariff related) dominated the rise in PPI (while Energy saw deflation)

Final demand services: The index for final demand services advanced 0.8% in January, the largest increase since moving up 0.9% in July 2025. Most of the January rise in prices for final demand services can be traced to margins for final demand trade services, which jumped 2.5 percent. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand transportation and warehousing services advanced 1.0 percent, while the index for final demand services less trade, transportation, and warehousing was unchanged.

• Product detail: Over 20% of the January increase in prices for final demand services is attributable to a 14.4% jump in margins for professional and commercial equipment wholesaling. The indexes for apparel, footwear, and accessories retailing; chemicals and allied products wholesaling; bundled wired telecommunications access services; health, beauty, and optical goods retailing; and food and alcohol retailing also moved higher. Conversely, prices for system software publishing fell 12.2 percent. The indexes for guestroom rental and for apparel wholesaling also decreased.

Final demand goods: Prices for final demand goods moved down 0.3% in January, the largest decrease since falling 0.7% in March 2025. Leading the January decline, the index for final demand energy dropped 2.7 percent. Prices for final demand foods decreased 1.5 percent. In contrast, the index for final demand goods less foods and energy advanced 0.7 percent.

• Product detail: Nearly 80 percent of the January decline in prices for final demand goods can be traced to the index for gasoline, which fell 5.5 percent. Prices for chicken eggs, electric power, gas fuels, fresh fruits and melons, and ethanol also moved lower. Conversely, the index for search, detection, navigation, and guidance systems jumped 15.5 percent. Prices for nonferrous metals and for pork also rose.

The Energy component of PPI could be about to re-accelerate…

Core PPI (ex food and energy) surged 0.8% MoM and is up 3.6% YoY (both hotter than expected) – the fast pace of price increase since March 2025…

Source: Bloomberg

Margin pressures remain as input prices rise faster than output prices…

The bottom line is that this will likely lead to a hotter than expected Core PCE print – something The Fed watches closely.