Wholesale prices saw a surprising jump in July, rising at a pace that was much higher than anticipated.
The producer price index (PPI), which tracks the prices of goods and services for final demand, climbed by 0.9% in July. This increase is the largest seen since June 2022, as reported by the Bureau of Labor Statistics on Thursday.
This rise was significantly above the expected 0.2% increase.
Over the past year, the PPI has gone up by 3.3% as of July, which is notably beyond the Federal Reserve’s target of 2%. This spike seems to coincide with earlier consumer inflation readings of 2.7%, potentially complicating anticipated rate cuts in September.
“Given the improved CPI numbers we saw on Tuesday, this is a rather unwelcome development for the Fed and could dampen the optimism surrounding next month’s expected rate decrease,” noted Chris Zaccarelli, chief investment officer at North Light Asset Management.
“The sharp rise in the producer price index today indicates that inflationary pressures are present in the economy, even if they’re not yet felt by consumers.”
Before the PPI report came out, the market almost universally expected that the Fed would lower interest rates by a quarter point in its upcoming September meeting.
Following the release of the PPI data, these expectations saw a slight decline, according to CME FedWatch.
The Dow Jones Industrial Average dropped by 129 points (0.3%), while both the S&P 500 and Nasdaq decreased by 0.2% and more than 0.1%, respectively.
The core PPI, which excludes the volatile food and energy sectors, also rose by 0.9%, outpacing the forecast of a 0.3% increase.
When food, energy, and trade services are excluded, the PPI saw a 0.6% increase, marking the largest rise since March 2022.
Service inflation was primarily responsible for this uptick, increasing by 1.1% in July. Trade service margins also expanded by 2% during the same period, likely a result of the ongoing trade tensions initiated during Trump’s presidency.
About 30% of the rise in service costs can be attributed to a 3.8% increase in wholesale machinery and equipment.
Increases were noted as well in portfolio management fees, which rose by 5.8%, and airline passenger service prices, which went up by 1%.
“The stronger-than-expected PPI, combined with a relatively soft CPI, suggests that businesses are absorbing much of the tariff costs rather than passing them onto consumers,” remarked Clark Geranen, chief market strategist at Calbay Investments.
“However, it seems that companies may soon start transferring some of these costs onto consumers.”
This aligns with forecasts made earlier this week by an economist from Goldman Sachs, stating that while consumers currently bear only 22% of tariff costs, this figure could rise to 67% if businesses begin to increase prices.
The recent producer price data adds further complexity to the Federal Reserve Chairman Jerome Powell’s position, especially with Trump advocating for a rate cut.
“We recently had a concerning job report, which may be more troubling than inflation right now,” expressed Ken Mahoney, CEO of Mahoney Asset Management.
“This is likely just a singular event for now, and there’s no clear trend emerging, but we’ll need to monitor how this develops.”
He added some humor reflecting on the situation, noting that “anyone who has issued a PPI will lose their job over the numbers.”
Earlier this month, Trump made headlines by firing BLS chief Erica Mantelfer after a report revealed ongoing weakness in the labor market. He plans to appoint Eji Antoni, a notable critic of mainstream economists, to head the bureau.
