Ominous signal by wholesale prices

Trend watch

The monthly container volumes for 5 of the top U.S. ports—Los Angeles, Long Beach, Savannah, SeaTac, Virginia/Norfolk—rose 0.8% in January. That’s back-to-back up months after an ugly four-month slide from August to November last year. While that’s a good sign, container traffic is down 3.7% compared to January 2025.

More broadly, volumes at the top 40 U.S. ports remain seasonally weak, which we show on slide 7 based on daily flows. And that’s before we get forthcoming softness related to Lunar New Year in March, which we noted here last week.

Our take

Wholesale prices, as measured by the Producer Price Index (PPI), increased in January despite large declines in the food and energy components. Core prices, which exclude food and energy, surged 0.8% during the month. That matches the largest monthly increase in nearly four years. It also boosted the year-over-year pace to 3.6%, which is a 10-month high.

More importantly, the biggest jump came from trade services, which tends to be stickier than goods-related inflation. There are pundits speculating that companies are passing along more of their tariff-related costs within services. While possible, it appears to be stretched without further evidence.

In the context of the PPI, trade services do not measure the price of physical goods. In other words, this isn’t about foreign trade (i.e., imports & exports). Instead, trade services measure the gross margins received by wholesalers and retailers. These entities as providers of "distributive services" rather than manufacturers, as they typically do not transform the physical product before sale.

The "price" of a trade service in the PPI is the difference between the selling price of an item and the cost of acquiring that item for resale, more commonly known as the margin price.

We’ve been concerned about when cost pressures would appear in the inflation trend. Typically, PPI leads consumer prices by several months – somewhere between three to six months, depending on the component. For instance, moves in energy prices, such as gasoline and diesel, are almost instantaneous and show up in the inflation statistics within a month or so. Conversely, price movements in other categories, such as vehicles, are much slower, taking six months or longer to materialize. 

While we aren’t overly concerned yet, the direction of inflation has clearly shifted and is no longer grinding lower. Indeed, in our 2026 outlook, we anticipated that inflation would tick higher.

If this inflation trend persists, it will pose a rather large hurdle for the Federal Reserve (Fed) to lower interest rates later this spring. At the very least, it would push rate cuts further back in the year. In a worst-case scenario, if inflation continued heated up – it could thwart rate cuts all together in 2026. However, it’s very premature to make that leap based on the current trend.  

Bottom Line

The U.S. economy remains resilient, but the data is still muddied by the government shutdown, which has created distortions and delays. Accordingly, we probably won’t get a clear read on the economy until early March. Nonetheless, we expect an uptick in U.S. growth to 2.5% in 2026. But the unevenness within the economy makes it feel more like there’s one foot on the gas (fiscal and monetary stimulus) and one foot on the brake (trade and tariff uncertainty, underwhelming job growth).