Wholesale prices surged in July, reigniting inflation worries

The economy’s soft landing just hit turbulence — courtesy of America’s wholesalers. The Bureau of Labor Statistics’ latest Producer Price Index (PPI) shows a 0.9% climb from June — triple the pace economists expected — and pushed the annual wholesale inflation rate up to 3.3%, from 2.4% in June, marking a sharp turn in the narrative after months of seemingly steadying data. July’s report is the clearest sign yet that inflation, presumed to be on a cooling trend, still has plenty of heat left.

This was the PPI’s fastest monthly gain in more than three years, matching jumps last seen in mid-2022 when post-pandemic supply strains and energy shocks were still rippling through the economy.

This wasn’t a narrow rise, either. Services prices surged 1.1%, led by higher costs in machinery wholesaling, portfolio management, hotels, and freight transport. Goods prices climbed 0.7%, with outsize gains in fresh and dry vegetables — up nearly 39% — along with meats, eggs, diesel, and jet fuel. Even the Federal Reserve’s preferred “core” measure (stripping out food, energy, and trade services) posted a hefty 0.6% monthly jump, signaling the heat isn’t just coming from any volatile categories.

President Donald Trump’s tariffs are now increasingly in the mix — and are finally starting to appear in the numbers. Tariff-exposed categories such as machinery and certain food products are showing the steepest increases, reinforcing the link between trade policy and price pressures. For much of the year, businesses absorbed higher import costs to protect customers and market share. But July’s PPI suggests that cover is thinning. 

Goldman Sachs expects consumers to bear roughly two-thirds of tariff costs by year-end, up from just over one-fifth this summer. Widening wholesale margins hint that pass-through is already happening, which could feed directly into consumer inflation in the months ahead; wholesale inflation often foreshadows retail prices, and if producer costs are rising this quickly, consumer prices may not stay tame for long.

Markets wasted no time recalibrating. S&P 500 futures were down roughly 0.3% in early trading. Two-year Treasury yields — which are highly sensitive to Fed policy — rose about 5 basis points to 3.73%. The dollar index gained 0.4%, reflecting a market bracing for tighter monetary policy for longer. And traders pared back bets on imminent rate cuts. The CME FedWatch tool still prices in a September cut but with far less conviction — and any hopes for aggressive easing later this year are looking more like wishful thinking unless the labor market stumbles.

For the Fed, the timing couldn’t be worse. While consumer inflation data earlier this week suggested some stability, wholesale prices often foreshadow what’s next at the checkout line. July’s surge raises the risk that consumer price growth will reaccelerate just as policymakers were preparing to ease up. If producer costs keep rising at this clip, households will see it soon enough — in grocery aisles, travel bookings, and freight-dependent goods.

Officials have been threading the needle between acknowledging progress on inflation and warning that the fight isn’t over. July’s wholesale numbers tilt the balance toward caution, especially when paired with Washington’s latest slate of tariffs that could keep price pressures elevated regardless of domestic demand. The report could give the central bank a reason to “wait and see” beyond September, especially if the August CPI or the Fed’s preferred PCE gauge on Aug. 29 shows a similar inflation acceleration.

Bill Adams, the chief economist for Comerica Bank, called the PPI numbers “another pebble on the scale against a rate cut at the Fed’s September meeting,” although he said the next jobs report would weigh more heavily.

The BLS said it would discontinue roughly 350 PPI indexes with the July report, seemingly due to budget constraints and underfunding — which some analysts have warned could make it harder to monitor price changes in niche sectors.

Earlier this week, CPI data for July showed that headline inflation was holding at 2.7% year-over-year, with core CPI edging up to 3.1%. That softer consumer reading had emboldened expectations for cuts — expectations that the PPI report quickly undercut. Import price data released Thursday also showed a 0.4% rise in July, adding to evidence that costs are building in the pipeline, while weekly jobless claims remained low at 228,000, suggesting no immediate labor-market weakness to justify faster easing.

“The large spike in the Producer Price Index (PPI) this morning shows inflation is coursing through the economy, even if it hasn’t been felt by consumers yet,” said Chris Zaccarelli, the chief investment officer for Northlight Asset Management. “Given how benign the CPI numbers were on Tuesday, this is a most unwelcome surprise to the upside and is likely to unwind some of the optimism of a ‘guaranteed’ rate cut next month.”

For consumers, the impact won’t be instant but could be noticeable by the fall. Grocery prices are likely to reflect higher wholesale food costs within a couple of months. Travel and hospitality, which helped drive July’s services spike, may become even more expensive heading into the holiday season. 

Businesses facing both rising input costs and higher borrowing costs may have less room to absorb shocks, raising the odds of outright price hikes rather than stealthier tactics such as shrinkflation. Earlier Thursday, Deere & Co. trimmed its profit forecast, citing higher input costs linked to tariffs, and several other major retailers have signaled they may lift prices before the end of the year to protect margins.

Still, not every economist sees the PPI jump as the start of a new inflation wave. Some suggest it could prove fleeting, with the biggest drivers — such as the spike in fresh and dry vegetables (up 38.9%) — more tied to seasonal swings than to a structural shift in prices. Others point out that while July’s jump was eye-catching, it hasn’t yet pushed the broader trend in producer prices decisively higher. Even the more upbeat voices, though, warn that tariff-driven import costs and widening wholesale margins could keep inflation sticky, complicating the Fed’s path back to its 2% goal.

The Fed’s next move now hinges on whether July’s PPI proves to be an outlier or a turning point. If upcoming CPI and PCE readings echo the wholesale surge, policymakers will be under pressure to delay cuts until they’re confident that inflation’s downtrend is intact. For now, July’s numbers serve as a loud reminder: Inflation’s encore can start without warning, and it doesn’t care about the market’s set list.