PPI shows the economy isn’t getting a fairytale ending

For months, markets have been seeming to run on the idea that the U.S. economy had managed the impossible: a soft landing where growth holds steady, inflation cools, and the Federal Reserve can gently release the brake pedal. It’s been the closest thing to an economic fairytale — Goldilocks with “just right” conditions that keep corporate earnings humming and consumers spending — without tipping into recession. Steady growth, tame inflation, and no angry bears barging in to ruin the breakfast. 

On paper, the conditions were looking good: GDP growth that was positive without overheating, and a labor market that — while softening — hasn’t completely fallen apart. But the stability fantasy is fading. As tariffs and inflation set in, the economic porridge is looking a lot, well, lumpier. Economists and Wall Street analysts are increasingly starting to see the kind of shift that could tip the balance from “just right” to “too hot” almost overnight.

On Thursday, July’s wholesale inflation numbers via the latest Producer Price Index (PPI) release stunned analysts. The PPI rose 0.9% month-over-month, far exceeding forecasts of about 0.2%, marking the largest increase since early 2022. Headline PPI climbed 3.3% year over year, up sharply from 2.4% the month before, while core PPI — which excludes volatile food and energy categories — increased 0.6% monthly and 2.8% annually, both multiyear highs. Northlight Asset Management chief investment officer Chris Zaccarelli called the release “a most unwelcome surprise.”

Services sectors led the rise, with trade services, portfolio fees, and hospitality driving broad-based cost pressures. Goods were also up — particularly in food categories such as vegetables and meats, which are sensitive to tariffs and supply-chain pinch points. Markets responded almost immediately. Stocks dipped, the likelihood of a 50 basis-point rate cut in September fell, and futures traders recalibrated toward only a 25 basis-point move — if any cut at all. The message: Inflation isn’t dead, and any semblance of an economic “fairytale” may be over.

Meanwhile, the risk isn’t just a too-hot bowl. A growing chorus of analysts is warning about a stagflation scenario where inflation stays annoyingly high while growth and hiring slow. The July jobs report came in softer than expected, consumer spending has lost some heat, and sector-level data is showing a widening gap between winners and losers. Tech giants are still living in a just-right world; manufacturing, shipping, and other trade-sensitive sectors are already feeling a chill.

Wall Street’s bears are restless

July’s PPI surprise didn’t create vulnerabilities in the Goldilocks setup so much as it underscored the ones that were already present. Goldman Sachs has, per MarketWatch, been warning for over a month that the Goldilocks equilibrium sits precariously atop three potential “bears”: growth shocks, rate shocks, and a turbulent dollar. The investment bank said that one of those could force the Fed’s hand or send markets recalculating the odds of a rate cut. After this week’s data, all three are looking more likely.

A growth shock could come if inflationary pressures persist and the Fed is forced to keep rates higher for longer. While headline CPI has been holding below 3%, a sustained move in wholesale prices often works its way into consumer inflation. If businesses start passing these costs through, households could face renewed price pressures at the same time that job growth is slowing — an unwelcome combination for spending and confidence.

A rate shock is another possibility. Treasury yields have already been choppy in recent weeks, reflecting a tug-of-war between hopes for easing and concern about sticky inflation. If bond markets start to doubt that the Fed can cut meaningfully without reigniting inflation, financial conditions could tighten abruptly, hitting sectors from housing to corporate borrowing. The repricing that followed Thursday’s PPI data showed just how quickly those expectations can shift.

And finally, the disorderly dollar scenario — more speculative but no less important — lurks. If U.S. policy expectations diverge sharply from those in Europe, Japan, or emerging markets, currency markets could see large and sudden moves. A stronger dollar can export disinflation but hurt U.S. exporters; a weaker dollar can lift import prices and add to inflation pressures. Either way, volatility in the dollar can feed back into broader market sentiment.

Thursday’s PPI spike nudged all three closer. Higher producer prices can work their way into consumer inflation, forcing the Fed to hold rates higher for longer — which raises the risk of a rate shock. That can, in turn, sap business investment, strain housing and credit markets, and eventually deliver a growth shock. And if rate expectations lurch sharply while the U.S. runs large fiscal and trade deficits, the dollar could see a bumpy ride. The not too cold, not too hot balance starts to look more like a tightrope.

The Fed wants everything “just right”

The Goldilocks economy only works if the porridge stays at exactly the right temperature: growth hot enough to avoid recession, inflation cool enough to keep policy makers comfortable. The Fed’s job is to keep it there, and for much of the summer, its patience has been treated as either admirable restraint or dangerous procrastination. This week’s dueling inflation reports tilted that debate toward discipline. 

Tuesday’s CPI report seemed to reward the patient camp, showing inflation that was contained enough to keep hopes for a September cut alive. But the mood turned quickly. The PPI release two days later didn’t just upend the storyline — it might have rewritten it.

“[The PPI data] is a kick in the teeth for anyone who thought that tariffs would not impact domestic prices in the United States economy,” Carl Weinberg, chief economist at High Frequency Economics, told Reuters. “This report is a strong validation of the Fed's wait-and-see stance on policy changes.” 

Peter Andersen, the founder of Andersen Capital Management, said that the PPI spike and the economy’s “mixed message” now “reinforces the case that the Fed might say we still don’t have a clear picture yet,” and suggested that no move in September could now be the safer call. “We have been too anxious to draw a conclusion that the economy is fine, it’s not overheated,” he said. “But this wholesale data does show that perhaps there is some inflation working and we shouldn’t be so quick to conclude [that] we need to cut interest rates.”

For Jerome Powell and his colleagues, the decision is less about splitting the difference between 25 and 50 basis points and more about protecting credibility. A premature cut that coincides with a resurgence in inflation would damage the Fed’s standing and risk forcing an even sharper tightening later. A pause, by contrast, would buy time to see whether wholesale price pressures filter into consumer prices — or whether July’s PPI proves to be a one-month aberration. That calculation is the essence of the “just right” challenge. 

In Goldilocks terms, Powell’s team is guarding the breakfast table. Cut too soon, and the bowl risks heating up too fast, just as supply-side pressures start to show up. Wait too long, and the cooling could overshoot into something closer to stall speed. Right now, the choice is less about appeasing Wall Street’s appetite and more about buying time — time to see whether July’s wholesale price spike is a one-off or if it’s the first ripple in a broader shift that makes “just right” nearly impossible to hold.

The next few prints will show whether “just right” is a setting or a bedtime story. Markets can keep bidding for a soft landing, but they don’t get to edit the plot if producer heat lingers, services cool too slowly, and demand starts to thin. From here, the story runs cold, hard evidence: pass-through has to fade, hiring has to steady, and the Fed has to resist writing the ending for effect. Hit those marks and the Goldilocks economy gets another chapter; miss them and we’re back to hard choices about growth and prices. 

Either way, a happily-ever-after isn’t in the mandate — and the porridge only stays on the table if each new print keeps it, simply, just right.