Wholesale prices increased in July at the quickest pace since February, as economists are keeping a sharp eye on inflation data amid President Trump’s trade war.
The 3.3-percent yearly increase — which blew past economists’ expectations — puts the Federal Reserve in a tough position, as the central bank faces pressure on both sides of its mandate to keep prices low and employment as high as possible.
The surprisingly weak July jobs report showed that employment conditions are worsening, but upward-moving prices mean the Fed will have to negotiate stagflationary concerns in the short term.
“After a string of data that pointed to greater odds of a September rate cut, the large upside surprise in the producer price data highlights the dilemma the Federal Reserve faces in judging the risks to its dual mandate,” Matthew Martin, an economist with Oxford Economics, wrote in a commentary.
Cutting interest rates could help support the job market by easing borrowing costs for businesses. But doing so could also add fuel to inflation, which has lingered at an annual rate of 2.7 percent for two months since June, according to the consumer price index (CPI).
The Labor Department’s producer price index (PPI), which measures prices that businesses charge each other before determining the final sales price they charge to consumers, advanced by 0.9 percent from June to July, marking a 3.3 percent increase on the year, the Labor Department reported Thursday.
That’s the sharpest increase in five months, more than quadrupling economists’ expectations for a 0.2 percent increase on the month. Removing the more volatile categories of energy and food, the “core” PPI advanced by 0.6 percent on the month, the fastest pace since 2022.
Economists attributed the sharp rise to tariffs and predicted further increases in price levels.
“So much for foreigners paying tariffs. If they did PPI would be falling,” Joseph Brusuelas, RSM US chief economist, wrote in a commentary. “The temperature is definitely rising in the core. This implies a hot [personal consumption expenditures] reading lies ahead.”
Nationwide economist Ben Ayers said businesses are being “increasingly squeezed” by tariff-related costs.
“Input costs for producers jumped in July as price pressures for businesses build from compounding tariff impacts,” he wrote. “While businesses have assumed the majority of tariff costs increases so far, margins are being increasingly squeezed by higher costs for imported goods.”
Oxford Economics’ Matthew Martin also pointed to cost pressures facing businesses and their reluctance to take them out of profits.
“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,” he wrote.
Raymond James economist Eugenio Aleman said the report “complicates” the Fed’s September rate decision. On Wednesday, Treasury Secretary Scott Bessent called for a half-point rate cut, which Aleman said is now off the table as result of the July PPI.
“The more concerning aspect is that the full impact of tariffs is expected to materialize in next month’s data, potentially pushing goods prices higher,” he wrote. “This complicates the Fed’s September decision, where a 25bps cut remains likely, but a 50bps move is most likely off the table.”
President Trump has been demanding rate cuts to spur the economy since the beginning of the year, seconded repeatedly by the head of the Federal Housing Finance Agency, William Pulte.
Bessent has gone back and forth on the independence of the Fed, calling the Fed’s monetary policy a sacrosanct “jewel box” before telling bankers this week to slash rates by half a percentage point.
Fed Governor Adriana Kugler resigned unexpectedly earlier this month, allowing Trump to temporarily appoint White House Council of Economic Advisers chair Stephen Miran to her position.
Two governors dissented from the Fed’s last decision to hold rates steady and supported a rate cut. The appointment of Miran to the Fed’s board gives the president another likely supporter of that minority opinion.
Other commentators said tariffs were not behind the July rise in wholesale inflation.
“Tariffs may well drive inflation, but this report is another instance where tariffs are not driving inflation,” Scott Helfstein, head of investment strategy at Global X ETFs, wrote
Financial markets dipped Thursday morning on the inflation report and the more precarious position it puts the Fed in.
The Dow Jones was down more than 100 points as of 10 A.M. Eastern Time. The S&P 500 was down 10 points. Both indexes are trading near record highs now after a major drop earlier this year sparked by the initial delivery of Trump’s tariffs.
Updated at 10:18 a.m. EDT
