The stock market was mixed on Friday, with the Nasdaq Composite (^IXIC 0.12%) and S&P 500 (^GSPC -0.04%) rising but the Dow Jones Industrial Average (^DJI -0.15%) easing lower as of noon ET. Markets had been primed to rise until the latest numbers of inflation came out before the market opened, after which those gains largely evaporated.

The inflation data coming from the Bureau of Labor Statistics Friday morning was for the Producer Price Index (PPI) report, which measures prices at various stages in the production process before goods and services are offered to consumers. Even though the PPI data offered some conflicting readings on the state of inflation at the producer level, investors seemed to focus on some of the more troubling aspects of the report.

What the November PPI said

November's headline Producer Price Index numbers raised concerns in some investors' minds. The index for final demand, which measures prices at the last stages before goods and services get offered to consumers, rose 0.3% for the month. That continued a string of similar rises in September and October and meant that the index has risen 7.4% over the past 12 months.

Person shopping at a store.

Image source: Getty Images.

At first glance, 0.3% doesn't seem like a big rise. However, it came even as energy prices at the final demand stage fell 3.3% on declines in gasoline, diesel, and natural gas. Even with that downward push, the index saw a 38% jump in fresh and dry vegetables, and prices of meat, eggs, and tobacco also climbed for the month. Taking out volatile food and energy prices, prices of goods for final demand rose 0.3%, failing to show as much moderation from levels earlier in the year than economists had hoped.

Moreover, prices of final demand services rose a faster 0.4%, with much of the boost coming from an 11.3% jump in prices for investment advice and securities brokerage services. Although passenger transportation costs fell, many other services saw price gains.

Looking further down the pipeline

There was better news in other parts of the PPI report. Prices of goods for intermediate demand, which are used earlier in the production process, were down sharply, falling 0.9% for processed goods and 3.2% for unprocessed goods. That brought the year-over-year changes for processed intermediate goods down to 7.7%, the first time in over a year that the yearly change has been below 10%. Unprocessed goods prices were up just 3% from year-ago levels.

Yet even at that earlier stage of the process, services costs remained stubbornly high. Intermediate demand prices for services were up 0.6% for the month and 6.7% over the past year.

Why services matter

When inflation first became a problem, the price gains were concentrated in the prices of goods. Consumers were able quickly to see the impact when they bought the things they needed, and the impact on the businesses that sold those goods was also pretty clear.

Yet in some ways, rises in prices of services can be harder to fight against. In a tight labor market, services companies that can raise the prices they charge their customers can afford higher wages to get the workers they need. In turn, wage gains can cause an upward feedback loop in price behavior, fueling higher levels of entrenched inflation across the economy.

Investors don't expect inflation to fall to pre-pandemic levels below 2% anytime soon, but they generally are looking for the pace of price growth to slow in 2023. If that doesn't happen to a significant extent, then it could prompt even more aggressive moves from central banks to get inflation under control -- and potentially hurt stocks that have already seen some big downward moves over the past year.