Mark P. from Fort Worth, TX asks: Hi Mitch, I saw that wholesale inflation jumped in July, supposedly the biggest increase in three years. I feel like the news is all over the place on this issue. Some say there’s little inflationary impact; others say that companies are starting to pass those costs on. What’s your take, and do you think this changes what the Fed may do?
Mitch’s Response:
You’re right. The July Producer Price Index (PPI) did show a sharp acceleration, up 0.9% from the prior month and 3.3% year-over-year. This marked the biggest monthly gain in three years, led by a 2% jump in margins at wholesalers and retailers. Some observers have linked these price increases to tariffs, noting that businesses may be raising prices rather than fully absorbing higher import costs.
I think we’re still in wait-and-see mode when it comes to gauging the pass-through effects of tariffs to consumer prices. As seen on the chart below, a significant portion of the price pressure came from services, which to date are not affected by import tariffs. Services inflation is a concern on its own, to be sure, but the link to tariffs may not be as straightforward.
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From what I’m seeing today, companies appear, so far, to be absorbing at least part of the tariff burden themselves. Margins have compressed in certain areas, which is neither surprising nor alarming. Businesses often balance between price increases and profit pressures in response to higher costs. In July, for example, a big portion of the services price increase came from portfolio management fees, which are tied to stock market movements, not tariffs.
There is some debate on whether producer prices are leading indicators for consumer prices. I tend to think they are, which means August and September data will be very telling for how the tariff/inflation story is playing out. I would expect to see some upward pressure on consumer prices in the fall, which, as you mention in your question, could impact the Fed’s thinking.
Fed officials do acknowledge tariffs can put upward pressure on inflation, and they’re likely to see any upward pressure on CPI as directly related to import duties. But they’re also balancing that against a cooling labor market and slower demand in the first half of the year. When you put all the economic data together, I think the Fed has a window to lower borrowing costs at its next meeting, but just by 25 basis points. Suggestions that the cuts may be bigger are overly optimistic, in my view.
From here, businesses will likely continue to juggle whether to pass along tariff costs or absorb them. We need more data to know for sure. In terms of the July PPI print, some of the volatility had little to do with tariffs at all. It doesn’t strike me as the start of a new, sustained inflation surge, but it does give the Fed some cover not to be overly aggressive with rate cuts.
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Disclosure
2 BLS. 2025. https://www.bls.gov/charts/producer-price-index/final-demand-goods-and-services-12-month-percent-change.htm
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