The PPI just jumped 0.9% — here’s what it means for tariffs, inflation, and Fed policy.
KEY TAKEAWAYS
PPI rose 0.9% in July–hotter than expected–led by services inflation
Tariff-sensitive goods prices are trending upward despite being overshadowed by services
Government has collected over $100B in tariffs from U.S. companies in 2025
Tariff impacts are entering the supply chain but not yet fully visible in CPI
Fed rate cut odds for September slipped slightly after PPI release
MY HOT TAKES
Tariff inflation is no longer a hypothetical–it’s in the producer data
Services inflation remains the bigger near-term problem for the Fed
Competitive markets may delay consumer price hikes, but they won’t prevent them
Fed is still likely to cut in September–but the data path matters
Markets should be watching PCE and jobs data for confirmation
You can quote me: “Yesterday’s PPI print was far from a close thunder clap, but rather more like some angry clouds building on the horizon.”
The heat is on. Cue the 1984 Glenn Frey song from Beverly Hills Cop. I know that I am dating myself, but I am pretty sure most of you have heard the song and remember Eddie Murphy’s iconic laugh. Back then, there was lots to laugh about in the exciting world of economics. 🤣🤓 Inflation had quite literally just come down from being in the double digits, having spiked to a high of 14.8% in 1980. By ‘84, CPI cooled to a comfy 4-ish percent and the Fed could finally take the vacation it had been planning for years. It was a zany year for the buttoned-up bankers. They raised rates 3 times in the first half of the year and then cut them aggressively 5 times starting in the fall. Fed Funds would begin the year at 9.5%, peak at 11.75% and end the year at 8.25%. How do you like those numbers? For context, in case you didn’t know, the Fed Funds rate that upsets you today is at 4.5%. For some more context, the reason that the 1980s Fed was so active that year is that CPI jumped from 3.79% to 4.6% in the first quarter. Even more alarming to the Fed was that PPI, the Producer Price Index, jumped from 0.6% to around 3% in the first 4 months of the year. You can say that it was a proactive Fed.
That almost-chart-topping (it hit #2) song’s opening lyrics are: “the heat is on–on the street.” Now we are back in 2025, and when it comes to inflation, the heat is certainly on, and it hit the street just yesterday in the Producer Price Index / PPI release that came in with a way-hotter-than-expected monthly gain of 0.9% after remaining flat in the prior month. Recall that the PPI represents prices paid by domestic producers and retailers–the folks that would be impacted first by the stiff wave of tariffs that has tightened its grip over the past several months.
Though it is a volatile number, it is looked at as a leading indicator of consumer inflation. This, of course, plays off of the base assumption that rational firms will pass tax hikes on to consumers–the basic premise for why tariffs are thought to be inflationary. That said, what does it mean to us if the PPI jumps so rapidly in a single month?
Well, before we get to the answer, we have to examine yesterday’s release more carefully. The best way to start is by examining 2 charts. Have a look at my first one, then keep reading.
You will recognize this as one of my favorite Bloomberg charts (ECAN <GO>). It tells you almost everything you need to know… almost. Look all the way over to the right-hand side and you will see the white line (PPI) spike–that’s the news headline. However if you observe the stacked bars that make up the PPI, you will see that the largest monthly contributor to the index was Services (teal-colored bar). Services inflation has been a problem since the pandemic and is not likely to be affected by tariffs. That’s bad, no question, but we want to know about tariffs, so we need to focus on the yellow-colored bar, Goods Less Food and Energy.
That category is exactly where we would see cost rises associated with tariffs. It is difficult to see on the chart because it is in the shadow of the larger Foods and Services bars. That tells us something in and of itself, but we need to dig deeper and see if we can spot a trend. Have a look at the following chart, then keep reading. Just look, we are almost there. 😉
This is a line chart of that Goods category from the ECAN chart above. The orange line shows the monthly gains from 2024 through current. It should be clear to you that the monthly number is volatile, so I plotted a 6-month simple moving average (grey dashed line) to see if we can spot a trend. With the moving average, we can clearly see an upward trend starting earlier this year. This, my friends, is the possible signal which everyone was waiting for regarding tariff inflation.
Now we can answer the question from above: what does this jump in PPI mean? First, tariffs are real and they are here. The government has collected over $100 billion in revenue from US companies in the first half of the year. Someone has borne those costs. In the context of PPI, it tracks the prices that domestic producers are receiving for their output (at the factory exit gate). Therefore, an increase in PPI means that domestic producers are charging more to retailers. It is reasonable to deduce that domestic producers could be passing a portion of tariff hikes on to retailers.
Second, we do not know–based on PPI–how much, if any, of those increases in cost of goods will ultimately be passed along to consumers… yet. Those numbers will be found in future Consumer Price Index / CPI releases.
So what do we know, based on yesterday’s PPI jump? Well, tangibly, we know that domestic producers are raising their prices, and that those price hikes are trending higher. We can deduce that those prices are going higher as a result of tariffs, but also possibly because of less competition from foreign manufacturers. Remember tariffs make importing finished foreign goods more costly, so domestic producers may be taking advantage of that.
Can we then deduce that, as those price hikes flow through the domestic supply chain, consumer prices will rise as end-retailers pass along the cost increases that may have been sparked by tariffs directly or indirectly? The answer is yes, but not with certainty. Economics–because it has to–abstracts the real world. Sure, rational firms pass cost increases to consumers–in an abstracted world. But in the real world, firms may not be able to pass those costs on to a market that may be highly competitive. However, there are also lots of cases where firms can and certainly will pass some or all cost increases on to the consumer. How much, if any? Only time will tell.
Yesterday’s PPI print was far from a close thunder clap, but rather more like some angry clouds building on the horizon. It is true that services and food PPIs caused the bulk of last month’s PPI jump, and that cannot be ignored. It is also true that the dreaded tariff-based inflation has entered the supply chain and is on the climb. I saw some seriously negative notes come out in the wake of yesterday’s print, and I get it, this may just be the canary in the coal mine. Is it enough to justify a Fed rate HIKE, 1984-style? No way. Is it enough to get the FOMC members on the fence to hold off for yet another meeting beyond September for another rate cut? For sure.
Fed Funds futures implied a 100% chance of a rate cut in September prior to yesterday’s data. After the release, that probability went to a 93% change. Those are really good odds by Wall Street’s standards. Still, it is far too early to tell if there will be a cut next month. We still have another inflation number (PCE price index) and a monthly employment number. The latter could be the real catalyst.
Later on in the song Frey asserts “you can make or break, can win or lose, that’s the chance you take, when the heat’s on you!” Folks, the heat is definitely on you. For now, I would suggest a cool drink and maybe a snooze in the shade of your favorite tree, but don’t get too comfortable, those clouds can move in fast.
YESTERDAY’S MARKETS
Stocks did a round-trip closing mixed but mostly unchanged as a super-hot and unexpected PPI lowered the odds of a Fed rate cut next month. Treasury Note yields climbed in response to the inflationary data print. Cryptos gave back some of the prior day’s gains on profit taking and ALSO in response to the hot PPI print–see yesterday’s note for details.
NEXT UP
Retail Sales (July) may have climbed by 0.6% for a second straight month.
Industrial Production (July) is expected to have been flat after gaining by 0.3% in the prior period.
University of Michigan Sentiment (August) probably improved slightly to 62.0 from 61.7.
Next week, we still have some important earnings along with housing numbers, regional Fed reports, FOMC meeting minutes, flash PMIs, and Leading Economic Index. You don’t want to be the only one without an umbrella, so check back in on Monday for your weekly calendars.