Producer prices in July rose faster than forecast across the board, giving investors and the Federal Reserve an inflation surprise just over a week out from Fed Chair Jay Powell’s crucial Jackson Hole speech.
The Producer Price Index (PPI) for July showed inflation for businesses rose 0.9% over the prior month, well ahead of the 0.2% increase that was forecast, data from the Bureau of Labor Statistics showed Thursday. On an annual basis, prices rose 3.3%, the most since February.
“Core” producer prices, which exclude food, energy, and trade services, rose 0.6% last month, the most since March 2022 and an uptick after prices were unchanged in June. On an annual basis, core producer prices rose 3.3%, which was also the most since February.
Stocks slipped following the release of Thursday’s data.
Thursday’s data comes two days after the July Consumer Price Index showed inflation pressures were broadly in line with forecasts, while “core” inflation last month reached a six-month high. On an annual basis, consumer prices rose 3.1% in July, an increase from 2.9% the prior month and still well ahead of the Fed’s 2% inflation target.
Read more: July CPI breakdown: Consumers feel the crunch of accelerating inflation
Producer prices measure price changes from the perspective of businesses offering or selling goods and services in the economy; consumer prices measure changes from the perspective of those paying for those goods and services.
Thursday’s data suggests, then, that companies will not absorb all costs incurred from tariffs but will pass some of these costs on to consumers in the form of higher prices.
“While businesses have assumed the majority of tariff cost increases so far, margins are being increasingly squeezed by higher costs for imported goods,” said Ben Ayers, senior economist at Nationwide. “We expect a stronger pass-through of levies into consumer prices in [the] coming months.”
Stephen Brown, an economist at Capital Economics, wrote in a client note Thursday that the surge in core PPI “was due to a head-scratching increase in margins for wholesalers and retailers.”
Brown added that this data still implies inflation running ahead of the Fed’s target, but a chunk of last month’s rise in services inflation is due to higher costs for portfolio management, a function of the stock market’s rally since reaching its April lows and something that “won’t concern the FOMC,” in Brown’s view.
Recent labor market data, as well as a growing number of Fed officials arguing for the merits of a rate cut, have seen markets price in a near-certainty that the central bank will begin cutting rates next month.
