Photographs Never Tell You What Happened Twenty Minutes Later

A negative PPI surprised investors, but supply shocks and persistent services inflation suggest the battle isn't over.

KEY TAKEAWAYS

• June's Producer Price Index surprised to the downside because energy prices collapsed as the temporary ceasefire reduced the war premium in oil markets. The report accurately reflected June–but not the conditions investors face today.

• Most of the improvement came from gasoline, diesel, jet fuel, and crude oil. Strip away those effects, and underlying producer inflation remained stubbornly elevated.

• Upstream inflation remains intense, with raw materials, metals, electronic components, and intermediate goods continuing to rise far faster than consumer prices. Those costs eventually pressure corporate margins or consumer prices.

• The renewed Middle East conflict, higher oil prices, record crack spreads, and limited global refining capacity suggest July's inflation picture could look very different. Supply constraints matter as much as crude prices.

• Supply-driven inflation is painful but ultimately temporary. Once geopolitical tensions ease, the war premium can unwind quickly, offering longer-term optimism despite near-term volatility.

MY HOT TAKES

• Markets often react to headline data while ignoring whether the underlying conditions still exist. Economic reports are snapshots, not forecasts.

• Investors should spend less time celebrating one month's inflation print and more time understanding where inflation is coming from. Supply shocks require a different framework than demand-driven inflation.

• The Federal Reserve is increasingly constrained because today's inflation pressures originate outside of monetary policy. Central banks cannot solve geopolitical disruptions or infrastructure shortages.

• Energy markets remain one of the most underappreciated drivers of macroeconomic risk. Refining capacity may matter more than the price of crude oil itself.

• Long-term investors should distinguish between structural inflation pressures and temporary supply shocks. Understanding that difference helps avoid emotional investment decisions.

• You can quote me: "June's inflation report described a world that no longer exists."

Those were the days, my friend. Well, that tagline was an age giveaway. If you are a GenX or older, you would immediately recognize that lyric fragment from the late-60s pop song. If you did recognize it, you are probably feeling a bit emotional. I get it; I was too when I typed the words. SNAP OUT OF IT, we have some work to do this morning. Oh and if you weren’t around in those days, I will point you to the three huge tubs of photographs in my basement. I am talking about real photographs–ones, printed on paper, the kind you had to wait a week for the drugstore to develop. One of my favorite is a shot of my family on a beach under a flawless sky. What the photograph doesn't show is that twenty minutes after it was taken, a squall came through and sent us running for cover, soaked to the bone.

That's the thing about photographs. They are perfectly honest about a moment–actually the 1/60 of a second (that’s the shutter speed 😉🤓) and completely silent about what came next. Yesterday morning at 8:30 AM Wall Street Time, the Bureau of Labor Statistics (BLS) handed us a photograph. The June Producer Price Index actually declined–the first negative print since the Hormuz crisis lit a match under energy markets–and Wall Street smiled at it like a proud parent. Cooler prices at the producer level, on the heels of Tuesday's friendly Consumer Price Index CPI. Peace, it seems, is disinflationary! There's just one problem: the photograph was taken in June, and the squall has already arrived.

Let’s start with what the photograph shows. The Producer Price Index for final demand fell 0.3% in June. Economists were expecting a flat reading, so a negative print was a genuine surprise–the pleasant kind, for a change. It gets better. May’s alarming 1.1% initial reading was revised all the way down to 0.6%, and the year-over-year figure eased to 5.5% from May’s 6.0%, which had been the hottest annual pace since November 2022. This, coming just one day after we learned that June’s CPI fell by 0.4%, pulling annual consumer inflation down to 3.5%--amounting to two consecutive mornings of friendly inflation data. Wall Street did what Wall Street does with good news: it celebrated first and read the footnotes…er, never. Lucky for you, I read the footnotes.

So, where exactly did the decline come from? Goods. Prices for final demand goods fell 1.4%, the largest monthly drop since July 2022, and energy plunged 6.4%. Gasoline tumbled 12% all by itself, accounting for nearly two thirds of the entire goods decline. Diesel fuel fell 18% in the intermediate demand tables, jet fuel dropped 17.2%, and crude petroleum declined 12.1%. Can you see a pattern? Of course, you can. Every one of those items is a barrel of oil wearing a different costume. June was the month the ceasefire held. Tankers were transiting the Strait of Hormuz, war-risk insurance premiums were deflating, and the war premium that had been stuffed into every gallon of refined product since late winter came rushing out. The BLS did its job with precision. It photographed a world that stopped existing over the July 8th weekend.

Now let me show you the first thing lurking in the shadows of that photograph, and I promise it will make your blood pressure tick up. Services prices rose 0.2% in June even as goods collapsed, and half of that increase came from a single line item: margins for fuels and lubricants retailing, which jumped 13% in one month. Read that again, and allow me to translate. Wholesale gasoline fell 12%, and the folks selling it to you raised their markup by 13%. The Millers pulled up to the pump in June expecting their peace dividend, and a healthy chunk of it had already been intercepted somewhere between the refinery gate and the corner station. This brings me to the concept that we like to use in economics circles–”rockets and feathers”--prices rocket up when costs rise and float down like feathers when costs fall. Here is why it matters beyond the sheer aggravation: if savings don’t get passed through on the way down, you can be certain that costs will be passed through–rather quickly and completely–on the way up. Hold that thought as we get to July.

Here is the deeper problem. Strip out food, energy, and trade services, the components economists consider noise, and producer prices still rose 0.1% in June and are up 5.1% over the past twelve months. That number has not budged. Now look upstream, where I like to hunt. Stage 1 intermediate demand, which is the rawest inputs in the US production pipeline–is running 11.0% year over year. Processed goods for intermediate demand: +11.1%. Unprocessed goods: +13.0%. Meanwhile, consumer inflation is 3.5%. Producer input costs are rising at roughly triple the pace of the prices consumers pay, and that wedge gets resolved in only one of two ways: companies eat it through their margins, or they pass it along to you. Watch this earnings season and tell me which one corporate America usually chooses. And here is the part that has nothing–NOTHING–to do with Iran: steel mill products rose 3.6% in June alone, in a month when nearly everything else was falling. Aluminum mill shapes are up 52% over the year, primary nonferrous metals are up 66%, and electronic components are up 27.6%. Data processing services rose 1.1% in a single month. Oh, and here is a subtle one for you: while crude petroleum was falling 12.1% in June, natural gas prices rose 16.6%. Even inside the energy complex, the component that feeds the power grid–and every humming data center attached to it—was moving the wrong way. That, my friends, is tariff policy meeting the AI infrastructure buildout, and no ceasefire on earth will bring those numbers down.

Services, over 68% of the entire index, rose at every single stage of intermediate demand in June–in a month when energy costs were collapsing around them.

Which brings us to the squall. The ceasefire fell apart over the July 11th weekend, US forces struck dozens of targets, and a naval blockade was reinstated near the Strait of Hormuz. WTI crude has surged back above $80 a barrel–an 11% jolt in a matter of days. But crude is not even the scary part. The 3:2:1 crack spread, which is the margin refiners earn turning crude into gasoline and diesel, just broke above its June 2022 record and hit an all-time high near $64 a barrel. Why? The US has permanently shuttered more than 1.2 million barrels per day of refining capacity since 2019, war-damaged plants abroad knocked out an estimated 4.5 million barrels per day of global refining output last quarter, and the EIA expects inventories of the three major transportation fuels to end 2026 at their lowest levels since 2000, with jet fuel covering the fewest days of demand since 1963. Translation: even if crude retreats tomorrow, refined products won’t give it all back. There simply aren’t enough refineries left to make them. When the July PPI is released on August 13th, that lovely -0.3% will, unfortunately, be a distant memory.

And that is precisely the problem sitting on Fed Chairman Warsh’s desk. The Federal Reserve cannot reopen the Strait of Hormuz. It cannot repeal a tariff. It cannot pour concrete for a new refinery, and it certainly cannot slow the hyperscalers’ insatiable appetite for chips and electricity. The inflation the Fed CAN treat–demand-driven services prices and corporate margin behavior–showed ZERO improvement in the very month everyone is calling a victory. That is why June’s dot plot erased the 2026 rate cut, and why the long end of the Treasury curve keeps whispering warnings the front end refuses to hear. Keep your eyes on the August 13th PPI release, on crack spreads, on tanker war-risk premiums, and on every syllable that comes out of the Fed’s meeting later this month.

Now, before you shred your brokerage statement, allow me to hand you the genuine good news, because there is some. This is, at its core, supply-shock inflation–and supply shocks are not sticky. They are violent, they are frightening, and they…wait for it… ultimately, end. We watched the proof in real time: the moment the ceasefire held in June, the war premium came pouring out of the pipeline so fast it dragged the entire index negative. That is not how entrenched, wage-driven, 1970s-style inflation behaves. That is how a squall behaves. When this conflict is resolved–and ultimately, it will be–the premium will drain away just as quickly as it arrived. Tankers will sail, insurance rates will normalize, and those double-digit pipeline numbers will deflate. It will take time, and the tariff and services embers will still need tending, but the storm itself will pass. Squalls always do. The June photograph wasn’t a lie, after all. It was a preview of the sunshine on the other side–you just have to get through the rain to see it.

YESTERDAY’S MARKETS

Stocks rose yesterday as the soft June PPI stacked on top of Tuesday's friendly CPI, with the S&P 500 gaining 0.38%, the Nasdaq climbing 0.62%, and the Dow adding 150 points, or 0.29%, to 52,658. Megacap tech did the heavy lifting–Apple jumped 4% to a record high on word that it won approval to launch its AI features in China–while chipmakers lagged, with Micron falling 8%. WTI crude rose about 1% to settle near $80 as fresh US strikes on Iran kept the war premium bid. Treasury yields edged higher, and the VIX ticked up to 15.97.

NEXT UP

• Retail Sales (June) rose by 0.2%--as expected–after climbing by 1.0% in May.

• Initial Jobless Claims slipped to 208k from 216k.

• NAHB Housing Market Index (July) is expected to remain at 35.

• Pending Home Sales (June) may have slipped by -0.5% after climbing by 3.8% in the prior period.

• Fed speakers today: Kogan, Schmid, and Jefferson.

• Important earnings today: UnitedHealth, Prologis, Citizens Financial, GE, US Bancorp, Abbott Labs, State Street, Netflix, and Alcoa.