Cumberland Advisors’ Chief US Economist David Berson summed up the April PPI report in his morning note on May 13th:
Slice and dice it however you want, but the April PPI was terrible. Inflation pressures are building, and it would be extremely unwise for the Fed to even consider easing monetary policy in this environment. Final demand PPI up by 1.4 percent for the month, pushing the 12-month trend rate up to 6.0 percent.
First, I’m in full agreement with David Berson.
Second, let’s look at the details in the report and estimate what lies ahead. To do this, we look at the intermediate components of the PPI. They have some forecast power. Whether the full price change impact will ultimately be passed through to consumers or be absorbed in part by businesses is always unknown. A “buyer’s strike” or other behavioral changes on the part of consumers alter the final outcome. What we do know is that intermediate goods and services price changes lead consumer prices by a few months. The BLS has plenty of data to support this conclusion.
The Richmond Fed and other sources help us project what lies ahead. Bottom line—we are not going to like the inflation coming over the summer months and into the midterm election cycle. Kevin Warsh was confirmed as new Fed Chair on the day that all national inflation forecasts were being rewritten for a worsening outlook.
Historical Lag Time (PPI to CPI Pipeline)
Producer prices act as an early-warning signal for consumer prices, but the transmission is never instantaneous. Richmond Fed economic research indicates that wholesale pipeline spikes flow into the Consumer Price Index (CPI):
Do rapidly rising producer prices signal pain ahead for consumers? We take a fresh look at the relationship between producer and consumer price indexes. We document a correlation between upstream producer prices and the Fed’s preferred measure of consumer price inflation (the personal consumption expenditure price index). Using a statistical model, we find that that levels and growth rates of producer prices have a statistically significant impact on consumer price inflation. Gaps between the two price indexes tend to normalize over time, which, given recent data, suggests that upward inflationary pressures on consumers could persist.
(“Building A Pipeline Between Producer and Consumer Prices” | Federal Reserve Bank of Richmond Economic Brief, September 2022, No. 22-38, https://www.richmondfed.org/publications/research/economic_brief/2022/eb_22-38)
A chart from a 2023 SUERF Policy Brief illustrates this pass-through:
My reading of the BLS website, the Richmond Fed paper, and the SUERF paper suggest the following sequence to me. Other economists may have different estimates of the intertemporal relationship between producer prices and consumer prices. This is my view, and all errors are mine. In my opinion, producer price changes lead consumer price changes by varying amounts depending on many factors. Though there is no certainty with exact time measurements to determine the connection in time between a producer price and a consumer price, we might think in these general terms:
- The one-to-three-month window (initial shock): High-velocity inputs like gasoline, diesel, and raw agricultural commodities pass through fastest. The 15.6% spike in retail-ready gasoline seen in the April 2026 PPI report hit consumer pumps almost immediately, explaining the recently released hot, headline-grabbing CPI report.
- The four-to-seven-month window (core sticky lag): For intermediate goods (like processed chemicals, plastics, or paperboard packaging), the Richmond Fed notes a persistent, statistically significant correlation (\(>0.3\[CS1] )) stretching up to seven months out. This means the +2.7% surge in processed intermediate goods will continue bleeding into core consumer goods through the fall of 2026.
- The services sector lag (varies): Services inputs, such as the 3.7% jump in intermediate transportation and warehousing costs, typically take two to four months to pass through. Retailers wait until contract renewals or inventory depletion before raising retail price tags to cover their higher freight overhead.
Corporate Profit Margins & Cost Absorption
The ability—or willingness—of companies to absorb these surging wholesale costs depends heavily on their market scale. A sharp divide has emerged between large corporations and small businesses:
Large Corporations (the Profit Buffer)
- Record margins: Going into 2026, aggregate pretax corporate profits for large-cap firms achieved their highest share of US gross domestic product (GDP) since 1947. Wall Street analysts project that S&P 500 earnings will still climb roughly 17% over the course of 2026.
- Capacity to absorb: Because their baseline margins are historically bloated, large firms possess an economic cushion. However, macro-analyses from the Federal Reserve reveal that the relationship between profits and inflation is nonlinear. When wholesale prices rise moderately, large firms aggressively hike prices to expand margins (often called “sellers’ inflation”).
- The tariff & war inflection: With massive cost shocks building simultaneously from tariffs and geopolitical energy pressures, a negative spread is beginning to form between PPI and CPI. This indicates that consumer pushback is starting to force even large firms to digest a portion of the wholesale spike, which may begin capping corporate margin growth later this year.
Small Businesses (the Margin Squeeze)
- No cushion: Unlike multinationals, smaller enterprises operate on thin, volatile margins. According to US congressional small business metrics, these firms face a strict binary choice when utility, labor, and intermediate material costs skyrocket: Immediately pass 100% of the cost to consumers or face rapid erosion of their operational profit margins.
So, what lies ahead? The economy is slowing down except for the AI data center building. And the green card announcement requiring applications to be made from outside the US is another negative economic shock to the country. My best guess? We are going to see inflation rates between 4% and 5%, month after month, for most of the rest of this year. I expect consumer price inflation of 4% to arrive with the summer heat. There is no exact, one-to-one mathematical formula used by economists, because the pass-through rate from intermediate demand (business inputs) to final demand (end consumers) fluctuates based on market conditions, industry type, and supply chain length. That said, historical data and SUERF economic research show distinct pass-through behaviors:
The General Pass-Through Rule
- Short-term pass-through (0 to 30 days): Roughly 25% of a 1% change in aggregate producer input prices transmits directly into consumer final demand prices within the first month.
- Medium-term pass-through (60+ days): The cumulative pass-through peaks at roughly 35%.
- The missing 65%: The remaining percentage does not directly transfer to final demand because it is absorbed by corporate profit margins, mitigated by long-term supplier contracts, or offset by corporate cost-cutting measures.
Variance by Input Category
The pass-through rate changes dramatically depending on the category of the intermediate good:
- Energy (highest pass-through): Energy inputs (like the +7.8% processed energy surge in April 2026) pass through to final demand almost instantly and at a much higher rate (often 50% to 70%), directly impacting transportation, logistics, and retail gas prices.
- Services & logistics (high pass-through): Increases in intermediate transport services (like the +3.7% warehousing jump) quickly pass into final goods prices, as physical shipping costs cannot easily be optimized out.
- Unprocessed commodities (lowest/slowest pass-through): Raw inputs (like crude metal or raw milk) must pass through multiple production stages (Stage 1 through Stage 4—see below) before hitting final demand. Manufacturers have more time to substitute materials or hedge costs, lowering the immediate pass-through rate to final demand.
How the BLS Separates the Flow
To prevent numbers from compounding falsely, the U.S. Bureau of Labor Statistics (BLS) explicitly separates the pricing flow into four stages of production:
- Stage 1 (raw inputs) feeds into Stage 2.
- Stage 2 (midsource) feeds into Stage 3.
- Stage 3 (late-stage) feeds into Stage 4.
- Stage 4 (near finished) directly impacts final demand.
Using the Richmond Fed research for guidance, we can expect that because April 2026 intermediate metrics saw large spikes in Stage 2 (+2.8%) and Stage 3 (+2.3%), these costs are currently moving down the pipeline and are expected to hit final demand PPI and CPI metrics over the next two to three months.
Further Reading
“A Pipeline Between Producer and Consumer Prices” | Richmond Fed,
https://www.richmondfed.org/publications/research/economic_brief/2022/eb_22-38
“PPI Final Demand‐Intermediate Demand (FD‐ID) System | US Bureau of Labor Statistics,”
https://www.bls.gov/ppi/fd-id/ppi-final-demand-intermediate-demand-indexes.htm
“How producer price changes transmit into final goods prices” | SUERF,
https://www.suerf.org/wp-content/uploads/2023/11/f_6132f64bf40643345fba816c742aaee2_74069_suerf.pdf
“Producer Price Index Frequently Asked Questions” | US Bureau of Labor Statistics,
https://www.bls.gov/ppi/faqs/questions-and-answers.htm
From the link above, we excerpt FAQ number 25, anticipating that readers may have questions about tariffs and the PPI:
Does the PPI include tariffs in its estimates of price change?
The Producer Price Index (PPI) measures the average change in prices US producers receive for the sale of their products. Since tariffs and taxes are not retained by producers as revenue, they are explicitly excluded from the PPI. However, pricing decisions producers make in reaction to tariffs are included in the PPI. For example, if a domestic producer is manufacturing a product that is subject to import competition and tariffs are placed on those imports, the domestic producer may increase its own prices in order to maximize revenue. In this case, the price increase for the domestic producer would be included in the PPI. Similarly, if a domestic producer exports products to a foreign country that placed tariffs on US products and the domestic producer lowered its prices either to better compete in the export market or to sell domestically excess inventory that resulted from those tariffs, those price decreases would also be reflected in the PPI.
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