Costs were sharply on the rise for producers and manufacturers in July, a sign that higher prices could soon filter down to American consumers.
US inflation on the wholesale level picked up steam last month, with prices rising by the fastest monthly pace since June 2022, new data showed Thursday.
The latest Producer Price Index, which measures the average change in prices paid to producers, jumped 0.9% from June, lifting the annual rate to 3.3%, according to Bureau of Labor Statistics data.
The PPI serves as a potential bellwether for the prices consumers may see in the months ahead.
“Producers are starting to feel the inflation fire heat,” Chris Rupkey, chief economist at FwdBonds, wrote Thursday. “It will only be a matter of time before producers pass their higher tariff-related costs on to the backs of inflation-weary consumers.”
Thursday’s readings far exceeded economists’ expectations for prices would rise by just 0.2% in July and 2.4% annually.
And considering the PPI covers the domestic output of goods and services and excludes imports, the potential consumer price inflationary impact could be underestimated, noted Brian Bethune, an economist at Boston College.
The Dow fell 175 points, or 0.4%, at the opening bell on Thursday. The broader S&P 500 fell 0.35% and the tech-heavy Nasdaq Composite dropped 0.3%. All three indexes mostly pared those losses later in the morning.
Earlier this week, the Consumer Price Index for July showed that falling gas prices kept a lid on overall consumer price hikes but that tariff-sensitive goods continued to get more costly.
“The large spike in PPI this morning shows inflation is coursing through the economy, even if it hasn’t been felt by consumers yet,” said Chris Zaccarelli, chief investment officer at Northlight Asset Management. “Given how benign the CPI numbers were on Tuesday, this is a most unwelcome surprise to the upside and is likely to unwind some of the optimism of a ‘guaranteed’ rate cut next month.”
Traders pared their bets that the Federal Reserve would cut its benchmark lending rate at its September meeting.
Excluding food and energy, core PPI also shot higher by 0.9%, sending the annual rate to 3.7%, the highest level since March.
PPI data typically has more variability and wild swings than CPI, and monthly economic data is volatile on its own.
Still, shifts in certain PPI categories are being closely scrutinized to gauge how President Donald Trump’s tariffs are making their way through the production chain.
“The concern with PPI is always that it could be a harbinger of inflation to come; and in that sense, this was not a good report,” said Tyler Schipper, an associate professor in economics at the University of St. Thomas in St. Paul, Minnesota.
More than three-quarters of the larger-than-expected monthly increase came from services, notably a sharp 4.5% upswing in purchased capital equipment prices.
“The targeted area of tariffs, which has been industrial goods, the pricing pressures are now spilling over to the service sector,” Joe Brusuelas, chief economist at RSM US, said in a phone interview. “[Services increases] all imply pipeline pressures for inflation.”
On the goods side, higher food prices were the biggest culprit behind a 0.7% monthly increase. Raw agricultural products leapt 12.8% highest from June; and within that, fresh and dry vegetables saw a 38.9% monthly price surge, which is the largest since March 2022.
“That clearly tells me that the tariffs that were slapped on Mexican agricultural imports are coming home to roost,” Brusuelas said.
Tariffs causing businesses to raise the prices they charge each other and how that could eventually show up in higher consumer prices over time does put “another pebble on the scale” against a Fed rate cut, Bill Adams, chief economist at Comerica Bank, wrote in a note to investors on Thursday.
However, hotter-than-expected inflation data will take a back seat to what’s happening in the labor market, Adams noted.
The jobs report for last month delivered a massive surprise: An estimated 73,000 jobs were added in July and there were substantial downward revisions for job growth in the two prior months. However, the unemployment rate has remained flat for much of the past year, in part due to fewer workers in the labor force.
“Immigration policy changes have caused a decline in the foreign-born workforce, and the pace of older workers exiting the labor force due to retirement or disability has picked up this year,” Adams wrote. “That has slowed growth of the labor force and kept it more or less in line with growth of labor demand. We’ll have to see which of these crosscutting forces dominates in the August jobs report, to be published on September 5.”
PPI is among a suite of monthly indicators viewed as crucial for gauging the health and trajectory of the US economy. However, this report lands at a time when the agency that produces the data is in flux.
Following the lackluster July jobs report and its larger-than-average revisions, Trump fired the BLS commissioner and baselessly claimed that the data was “rigged.”
Earlier this week, the president nominated E.J. Antoni, an economist for the conservative Heritage Foundation, to helm the BLS.
Antoni, who has received criticism from economists and organizations that rely heavily on economic data, caused a brief stir earlier this week when comments published that he considered suspending the monthly jobs report so the methodology could be adjusted. However, fellow Heritage Foundation economist Stephen Moore told CNN that Antoni will continue to publish monthly jobs numbers if he is confirmed for the role.
In addition to uncertain leadership, the BLS is one of many federal agencies that have been subjected to funding and workforce cuts under the Trump administration. Citing ongoing limitations in resources, the BLS has reduced collections in its CPI report and, starting in July’s PPI, stopped calculating 350 indices.
“The announced discontinued indexes represent less than 1 percent of the PPI. Their removal will have minimal impact on the accuracy of the PPI final demand index,” Scott Sager, a PPI and BLS spokesperson, told CNN via email. “BLS discontinues series when they can no longer be supported with existing resources.”
The reduction in collections comes at a time when economists, former BLS commissioners, statisticians and other academics are pleading to Congress that the US statistical agencies receive more — not less — funding.
