WASHINGTON (TNND) — Wholesale inflation increased well above expectations and at the fastest rate in more than three years in another signal that tariffs may be starting to lead to higher prices that are expected to make their way to consumers.
Thursday’s producer price index, a measure of prices paid to producers, increased 0.9% in July from June. On an annual basis, wholesale inflation increased by 3.3%, according to the Bureau of Labor Statistics.
“Core” producer prices, which exclude volatile food and energy costs, also rose 0.9% from last month — the highest jump since March of 2022. Year-to-year, core prices increased 3.7% after coming in at 2.6% for June. The Federal Reserve targets 2% inflation in its interest rate decision.
Services inflation accounted for a significant chunk of the jump, increasing 1.1% in July. Thirty percent of services’ increase was caused by a 3.8% uptick in machinery and equipment wholesaling. Indexes for financial management services like securities brokerage and investment advice also increased.
Wholesale food prices increased 1.4% in June, much of which came from a 38.9% spike in vegetable prices. Home electronic equipment prices also accelerated 5% from the month prior. Both are heavily imported to the U.S. and are more vulnerable to tariffs.
Economists and investors watch the PPI report because some of its data is used to calculate personal consumption expenditures, the Federal Reserve’s preferred measure of inflation that will influence how it moves forward with its interest rate decision next month. Increasing inflation will make it more difficult for the Fed to lower rates over concerns that easing interest costs too soon could help fuel inflation.
Producer prices can also be an indicator of higher prices to come for consumers in the coming months. Businesses so far have appeared to be willing to absorb at least some of the higher costs from tariffs, but a growing share of major retailers have been warning of price increases to come in the months ahead.
Thursday’s report is the second this week that showed inflation may be accelerating after the “core” reading of the consumer price index increased to 3.1% on an annual basis, though the headline figure remained steady at 2.7%.
Economists and the Fed have been watching inflation figures to see if President Donald Trump’s tariff regime would lead to higher prices for consumers as companies start passing increased costs to import goods onto customers. That trend has been slow to materialize as companies bought large stockpiles of products to put off having to increase prices for inflation-wary consumers.
Fed chair Jerome Powell has noted it was difficult to determine the timing of potential tariff-induced price increases.
“We have learned that the process will probably be slower than expected at the beginning, but we never expected it to be fast. And we think we have a long way to go to really understand exactly how we’ll be,” Powell said after the July meeting.
The Fed is also trying to determine whether tariff-related price increases will be a one-time bump or cause sustained inflation. Fed officials that advocated for a rate cut at the last meeting have argued it will be a one-time hit and will not lead to sustained increases like what happened in the post-COVID economic rebound.
Uncertainty over where inflation is heading may make it more difficult for the Fed to cut rates at its September meeting, which had been a growing consensus among investors on Wall Street after this month’s jobs report revealed a slowing labor market and lower job creation totals than originally thought with big revisions to the previous two months’ data.
Thursday’s inflation data modestly pared back investor expectations for a rate cut at the Fed’s September meeting, but Wall Street is still broadly expecting officials to move forward with a quarter-percent cut, according to the CME FedWatch Tool. Interest rates have been stuck in place for five consecutive meetings at a range of 4.25% to 4.5%, which Trump and other administration officials have been pressing to be cut.
The producer price index is the second report released by BLS since the jobs report led Trump to remove its leader, who the president accused of manipulating the data for political reasons. He has nominated the chief economist from the Heritage Foundation to replace her, which has raised some concerns about the reliability of the government data widely used by economists, investors and the Fed to guide their decisions.
