The AI, PPI Conundrum
When Structural Displacement and Sticky Inflation Arrive from the Same Source
Block’s (Ticker: XYZ) announcement yesterday, the 26th of February — cutting 4,068 employees, roughly 40% of its workforce, reducing headcount from just over 10,000 to just under 6,000 — arrived alongside a fourth quarter that showed gross profit up 24% year-over-year to $2.87 billion.¹ CEO Jack Dorsey was explicit: this is not distress, it is redesign. AI, he argued, makes a smaller team more capable than a larger one. Block’s stock is up ~15% in today’s trade.
That distinction matters. Classical unemployment theory links job losses to the business cycle — companies shed labor when demand contracts, then rehire on recovery. What Block represents is categorically different: structural displacement occurring against a backdrop of rising corporate profitability. Productivity gains accrue to equity holders while displaced workers absorb the transition cost. With Block’s stock down ~80% since February 2021, I find myself intrigued whether Dorsey’s definitive framing of AI leading to the massive reduction in force is indeed the driver — or is it simply a zeitgeist that comes in handy.
Into today’s PPI print arrives confirmation of the second bind. January final demand rose 0.5% month-over-month — beating consensus of +0.3% — and 2.9% year-over-year. The headline masks a troubling composition. Goods provided relief, falling 0.3% on an energy drag, but services surged 0.8%, the largest monthly advance since July 2025. Trade services — distribution margins — jumped 2.5%, with professional equipment wholesaling alone up 14.4%. More telling: final demand less foods, energy, and trade advanced 0.3% for the ninth consecutive month, putting the core measure at +3.4% year-over-year. This is not a one-month spike. Pipeline pressure confirms the direction — Stage 4 intermediate demand runs at +3.8% YoY, primary nonferrous metals at +58% YoY on tariffs and AI infrastructure demand, trade services at the intermediate level at +6.5% YoY.
The Fed’s bind is now tighter. Structural unemployment, if it spreads as Dorsey predicts, argues for rate relief — weakening labor income constrains consumption. But nine consecutive months of core PPI acceleration, services running hot across every major sub-index, and no clean goods disinflation story outside of energy leave no intellectually honest case for an early pivot. The money market is currently pricing the first Fed rate cut no earlier than June, but today’s data could nudge it further away given its passthrough to PCE, the Fed’s preferred inflation gauge. The dual mandate was built for a different kind of disruption — one where job losses and price pressure don’t arrive together, from the same source.