As we discussed last month, US producers recently experienced the quickest price jump in more than three years. The producer price index (PPI) jumped by 0.9% from June to July. This historic leap is the biggest monthly increase since June 2022. In their most recent report, the Labor Department acted on this emerging consensus by releasing this finding. The increase in wholesale prices is bad news for the economy overall, especially with respect to inflation and interest rates.
The PPI is one of the most important yardsticks for measuring overall selling prices that US producers are able to command. And wholesale prices for services just went up 1.1%. Over that same period, wholesale prices for goods shot up by 0.7%. Almost half of the increase in wholesale prices for goods was due to surging food prices. These prices, which encompass the cost of delivering and processing waste, have been particularly volatile in recent months.
Analysts had forecast a small gain of only 0.2% in the PPI. The resulting number ended up being a big upside surprise. This surprise jump could make the US Federal Reserve’s decisionmaking on cutting interest rates tougher. The Federal Reserve has delayed cuts this year in large part due to stubborn inflation. Today it is under new fire to reconsider its approach.
“The large upside surprise in producer prices highlights the dilemma the Federal Reserve faces.” – Matthew Martin, senior US economist at Oxford Economics.
Couple this with the new costs imposed on US domestic producers by US President Donald Trump’s tariffs, and you’ve compounded the inflationary pressures. Samuel Tombs, the chief US economist at Pantheon Macroeconomics, recently noted the long-lasting effects of these tariffs. Third, they continue to propagate cost pressures through the supply chain.
“New tariffs are continuing to generate cost pressures in the supply chain, which consumers will shoulder soon.” – Samuel Tombs, chief US economist at Pantheon Macroeconomics.
Once you account for the producer price jumps, consumer prices have not registered any early runaway inflation at 2.7% in July. This stability is in sharp contrast to the rapidly increasing producer prices and highlights fears of deeper inflationary trends developing in the future.
Producers are coping with ever-changing input costs in an unstable economic climate. At the same time, consumers are preparing for increased costs that will result from these reforms. The upcoming months will be critical in determining how these factors interact and influence both consumer behavior and Federal Reserve policy decisions.