Key Takeaways
- A higher-than-expected July Producer Price Index report has economists asking whether consumers will soon see price increases as businesses struggle with higher costs.
- Tariffs likely contributed to price increases on goods that are subject to tariffs.
- After the wholesale inflation report was released, investors dialed back expectations for a Federal Reserve interest rate cut in September.
Data on wholesale inflation is reigniting worries that price pressures from tariffs are imminent— and investors took notice.
The Producer Price Index rose 0.9% in July, well above the 0.2% increase economists expected on average. Core PPI, which excludes foods, energy, and trade services, rose by 0.6% over the month, the largest monthly increase in the metric since March 2022.
According to last weeks report on consumer prices, businesses have broadly held off on passing increased tariff costs onto consumers. But Thursdays data on wholesale inflation may indicate a change is coming.
“Tariff-exposed goods are rising at a rapid clip, indicating that the willingness and ability of businesses to absorb tariff costs may be beginning to wane,” said Matthew Martin, senior economist at Oxford Economics.
What Does the PPI Report Mean for the Fed?
The PPI data could affect the Federal Reserve’s plans for cutting interest rates.
Before the inflation print was released Thursday morning, traders were pricing in a 100% chance that the Fed would cut rates at its next meeting in September, according to the CME Group’s FedWatch tool. CME forecasts rate movements based on fed funds futures trading data.
After the report was released, they pulled back from that certainty. As of noon ET on Thursday, traders thought there was more than a 9% chance that the Fed officials would hold their rates steady, as they have all year.
Fed officials are less sure that a rate cut is the right move, and this data could give them leeway to continue their wait-and-see approach.
“This emboldens those who are less dovish on the Fed that a September cut is not a done deal,” wrote BMO senior economist Jennifer Lee.
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