Wholesale inflation surges in July, raising questions for Fed and markets

Wholesale inflation in the US accelerated sharply in July, with the producer price index rising 0.9% from the previous month, according to the Bureau of Labor Statistics (BLS).

That monthly gain, the largest since June 2022, pushed the annual rate to 3.3%, well above the Federal Reserve’s 2% target and consensus forecasts of 2.4%  .

Economists had expected a much smaller 0.2% increase after June’s flat reading. The jump in wholesale prices is being closely watched by advisors and investors, as it could signal a jump in consumer prices in the coming months as the impact of tariffs becomes increasingly apparent.

Services and goods drive the increase

More than three-quarters of July’s increase came from services, which rose 1.1% for the month. Trade services margins climbed 2%, with a notable 3.8% rise in machinery and equipment wholesaling.

Portfolio management fees surged 5.4%, and airline passenger services prices increased 1%. On the goods side, prices rose 0.7%, led by a 38.9% spike in fresh and dry vegetables, while gasoline prices fell 1.8%.

Core inflation and market reaction

The core producer price index, which excludes food, energy, and trade services, climbed 0.6% in July, the largest monthly gain since March 2022. On an annual basis, core PPI was up 2.8%, also above expectations.

Stock futures dropped after the report, and shorter-term Treasury yields moved higher as traders recalibrated their expectations for Federal Reserve policy. Following an earlier BLS data release this week showing a modest uptick in headline CPI, market bets on a September rate cut once again decreased, though expectations are still for the Fed to keep a close eye on upcoming inflation and jobs data.

Tariffs and pipeline pressures

Economists and market strategists pointed to ongoing tariff policies as a key factor behind the jump in producer prices.

“The fact that PPI was stronger-than-expected and CPI has been relatively soft suggests that businesses are eating much of the tariff costs instead of passing them onto the consumer,” Clark Geranen, chief market strategist at CalBay Investments, told Barron's. He added that businesses may soon start to reverse course and pass these costs to consumers.

Gina Bolvin, president of Bolvin Wealth Management, said the July numbers reflect lingering cost pressures, some driven by tariffs, but noted that “core inflation trends remain contained.” She added that the path to lower rates may not be linear, even as the broader disinflationary trend continues.

Chris Zaccarelli, chief investment officer for Northlight Asset Management, said, “The large spike in the Producer Price Index this morning shows inflation is coursing through the economy, even if it hasn’t been felt by consumers yet.” He cautioned that the news is likely to unwind some of the optimism for a “guaranteed” rate cut next month.

Bill Adams, chief economist for Comerica Bank, said the numbers reflect an increasingly harsh reality for tariff-squeezed business owners.

"Tariffs are causing businesses to raise the prices they charge each other, which will show up in higher consumer prices over time," he said. "The report is another pebble on the scale against a rate cut at the Fed’s September meeting."