US producer inflation highest in three years, clouding Fed outlook
WASHINGTON
U.S. producer price inflation rebounded sharply in July to its highest level since 2022, with monthly data showing a 0.9 percent rise after a flat June, complicating the Federal Reserve's efforts to juggle inflation risks against labor market health in timing the next interest rate cut.
Fed officials have been closely watching tariffs' effects on consumer prices, with some viewing the impact as temporary and others wary of longer-lasting pressures.
Services costs outpaced goods, driving a bigger-than-expected advance, though economists cautioned that volatile elements might inflate the headline figure even as tariff-exposed goods show real gains.
The producer price index (PPI), which tracks changes in producers' prices and often signals future consumer trends, climbed to a year-over-year 3.3 percent , according to the Bureau of Labor Statistics.
Goods prices rose 0.7 percent , while services surged 1.1 percent —the largest such increase since March 2022.
The July uptick was "broad-based," but over three-quarters stemmed from services, particularly trade services tied to wholesaler and retailer margins, the Labor Department noted.
This volatility hints at supply chain disruptions, yet goods like foods accounted for 40 percent of the advance.
Businesses are contending with President Donald Trump's broad tariffs, including a 10 percent levy on most trading partners and higher rates on steel and aluminum.
"Input costs for producers jumped in July as price pressures for businesses build from compounding tariff impacts," Nationwide senior economist Ben Ayers said in a note.
"While businesses have assumed the majority of tariff costs increases so far, margins are being increasingly squeezed by higher costs for imported goods."
He flagged spikes in metals and foods, with steel and aluminum—hit by 50 percent duties—seeing recent jumps that heighten manufacturer worries.
Ayers anticipates more pass-through to consumers ahead.
"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," added Oxford Economics senior U.S. economist Matthew Martin.
Consumer inflation via the CPI held at 2.7 percent in July, but combined with softer hiring revisions, it has boosted odds of a September Fed cut.
Martin called the PPI data a "counter-balance," underscoring the Fed's tightrope: "The big picture remains that inflation is further away from the Fed's target than the unemployment rate and is likely to climb further over the coming months."
"The path forward will have to traverse a tight rope between the next employment and price reports," he added.
