What Producer Prices Tell Us About Inflation When Energy Spikes

US wholesale prices jumped 0.5% in March, but strip out energy and the number drops to 0.1%. That's the story in a nutshell. Gas prices went up 16% because of the Iran conflict, and that accounted for nearly half the increase in goods prices overall. But the underlying inflation picture, the stuff businesses are paying for labor and materials and logistics, stayed pretty quiet.

This matters because producer prices sit upstream from consumer prices. What companies pay eventually filters down to what you and I pay at the checkout. So when the Producer Price Index (PPI) shows energy driving the headline number but core costs barely moving, it tells you the inflationary pressure is narrow, not broad. At least for now.

The big question is whether that holds. March's data is backward-looking. The naval blockade in the Strait of Hormuz didn't start until early April, and shipping disruptions take time to show up in the data. Industrial inputs like helium, steel, chemicals—these haven't spiked yet, but they're sensitive to what happens in the Persian Gulf. If the conflict drags on, businesses start eating higher costs or passing them along, and the core PPI number stops being so calm.

The March PPI report breaks down into goods and services. Goods prices rose by the most since August 2023, almost entirely because of energy. Gasoline specifically. Services prices were flat despite a 1.3% jump in transportation and warehousing, which is exactly the category economists flagged as vulnerable to war-related disruptions.

That's a weird split. You'd expect transportation costs to push services higher, but they didn't. Part of that is probably timing—March captures the initial shock, not the sustained impact. And part of it is that other service categories like portfolio management and healthcare didn't accelerate enough to offset the flatness elsewhere.

The other thing to watch is processed goods for intermediate demand. That's a mouthful, but it basically means the stuff companies buy to make other stuff. Those costs rose by the most in nearly four years, driven by energy and food. If you're a manufacturer buying raw materials, your input costs are climbing faster than the headline PPI suggests. That's upstream pressure that could eventually hit finished goods prices.

The Federal Reserve cares about the Personal Consumption Expenditures (PCE) price index more than PPI, but several PPI components feed directly into PCE. Air travel costs jumped 4.1% in March. Portfolio management fees rose 1% for the second month in a row. Healthcare costs stayed muted, which is good because healthcare is a big chunk of consumer spending.

Fed Chair Jerome Powell has been talking about data center construction as a source of price pressure for electronics and industrial equipment. The March PPI showed that inflation in things like computers, transformers, and switchgear either flattened out or barely budged. That's a small relief, but it's also just one month. If energy costs keep climbing and logistics get messier, those categories could heat back up.

Right now, futures markets are pricing in almost no chance of a rate cut in 2026. That's partly because of the oil shock and partly because inflation was already sticky before the Iran conflict started. Some economists still think the Fed could cut rates later in the year if the war de-escalates and energy prices settle, but that's speculative. The Fed's going to wait and see what the data does, and the data is going to depend heavily on how long this conflict lasts.

There's another variable in here that doesn't get as much attention in the PPI headlines: tariffs. President Trump tried to impose a bunch of new duties earlier this year, the Supreme Court struck most of them down in February, and now he's trying again using different legal provisions. The March PPI included a line item called trade services costs, which is basically a proxy for profit margins on imported goods. That number fell for the second month in a row after spiking in December and January.

What that suggests is companies had room to absorb some tariff-related costs without immediately passing them along. But if energy prices keep rising and tariffs come back, that margin shrinks. At some point, businesses stop eating the cost and start raising prices. Whether that happens in Q2 or Q3 depends on how much pricing power companies actually have in a slowing economy.

The US-Iran conflict is already reshaping how traders think about energy, commodities, and inflation-sensitive sectors. If you're holding positions in industrials, materials, or energy, the question isn't just what oil does next week. It's what the second-order effects look like three months from now when helium shipments are still disrupted, when freight costs have compounded, when manufacturers have burned through their inventory buffers.

The optimistic read on March PPI is that core inflation stayed low despite a massive energy spike. The pessimistic read is that March was just the beginning. The Strait of Hormuz blockade started in April, not March. Shipping routes are getting rerouted. Insurance costs are climbing. Lead times are extending. All of that shows up later, not immediately.

Samuel Tombs from Pantheon Macroeconomics called the core PPI print "genuinely good news," but he also said PPI energy prices will rise considerably in April. That's the tension here. The backward-looking data looks okay. The forward-looking setup looks messy.

And then there's the risk that peace talks break down. S&P 500 futures rallied after the March PPI report partly because there was optimism about another round of negotiations between the US and Iran. If those talks stall, energy prices spike again, and the whole inflation trajectory shifts. The Fed can't cut rates if headline CPI is running hot because of $120 oil, even if core inflation is behaving.

The other risk is that businesses have more pricing power than the March data suggests. If companies start passing along higher input costs aggressively in Q2, the core PPI starts climbing, and then the Fed's stuck. They can't ease policy to support growth, and they can't tighten policy without pushing the economy into a deeper slowdown.

If you're trading around inflation data, the key thing to understand is the lag structure. PPI leads CPI, but both lag the actual economic events that drive them. March PPI reflects early-March pricing conditions. The naval blockade happened in early April. The real test comes when we see April and May data.

For now, the market is treating this as an energy shock, not a broad inflation problem. That's why risk management matters more than trying to predict whether oil hits $130 or $90. The setup is volatile, the macro variables are shifting weekly, and the data is going to be noisy for at least another quarter.

The next major data point is the March PCE release on April 30. That's the Fed's preferred inflation gauge, and it'll give a clearer picture of whether the energy spike is translating into broader consumer price increases. Until then, wholesale prices are telling us the inflationary pressure is real, but it's concentrated. Whether it stays concentrated depends on variables that haven't fully played out yet.