Washington, D.C. - On July 16, the U.S. Labor Department released data indicating that producer prices remained unexpectedly unchanged in June. This stability came despite a tariff-driven increase in the costs of certain goods, particularly in the communication and related equipment sectors. This rise in goods prices was effectively countered by a notable decrease in demand for travel services.
The recent weakness in the cost of services suggests that the inflationary pressures spurred by tariffs may not lead to widespread price increases. This outlook provides a glimmer of hope that the Federal Reserve can consider resuming interest rate cuts later in the year. The data collected supports the consensus among economists that the central bank is likely to maintain its benchmark overnight interest rate in the 4.25% to 4.50% range during its upcoming policy meeting scheduled for July 29-30.
Despite the unchanged Producer Price Index (PPI) for final demand last month, an upwardly revised increase of 0.3% from May indicates that the tariffs imposed by President Donald Trump in April are beginning to influence inflation trends. On July 15, the government reported that the Consumer Price Index (CPI) saw its largest increase in five months during June, particularly in categories sensitive to tariffs.
Minutes from the Federal Reserve's last meeting, released last week, revealed that only a few officials believed there was a possibility of rate cuts this month. President Trump has been vocal in urging the Fed to lower borrowing costs immediately. Reports from Bloomberg suggested that Trump might consider firing Fed Chair Jerome Powell, causing some instability in the financial markets; however, the President later assured reporters that he had no such intentions.
Christopher Rupkey, chief economist at FWDBONDS, stated, "The inflation threat is alive and very real, and if this does not put a Fed rate cut in July out of the question, then nothing will." He also noted that the Fed may be hesitant to push for rate cuts without aligning with the President's interests.
The unchanged PPI reading for June followed an upward revision of a 0.3% increase in May, according to the Bureau of Labor Statistics. Economists had anticipated a 0.2% rise, following a previously reported 0.1% gain in May. The BLS also revised PPI data from February through May to account for late reports and corrections from respondents. Over the past year, the PPI has increased by 2.3%, down from 2.7% in May.
In June, monthly goods producer prices rose by 0.3%, following a 0.1% gain in May. More than half of this increase was attributed to a 0.3% advance in wholesale goods prices, excluding food and energy. Notably, core goods prices saw a rise of 0.2% in May, supported by a significant 0.8% jump in prices for communication and related equipment, which followed a 0.4% increase in May.
Household furniture costs surged by 1.0% in June after a 0.7% increase in the prior month, while prices for home electronic equipment rose by 0.8% after remaining unchanged in May. Passenger car prices also rebounded with a 0.3% increase. The changes in wholesale goods prices reflected similar trends observed in the CPI goods components. Notably, wholesale food prices increased by 0.2%, driven by a significant 0.8% rise in the cost of beef, although egg prices plummeted by 19.8%. Energy prices experienced a 0.6% increase, largely due to a 1.8% rise in gasoline costs.
According to Conrad DeQuadros, senior economic advisor at Brean Capital, "The 3.8% annualized increase in these goods prices over the last three months is the fastest since March 2023." This may indicate that rising input costs are forcing companies to increase prices or that tariffs are providing a protective cushion allowing for price hikes.
In contrast to goods, wholesale services prices declined by 0.1% after a 0.4% rise in May. A significant contributor to this drop was a 4.1% decrease in wholesale prices for hotel and motel rooms, which accounted for more than half of the decline in services. Additionally, airline fares fell by 2.7%. An uncertain economic outlook, exacerbated by tariffs, has led to decreased consumer spending, particularly in travel sectors, while foreign tourist numbers visiting the U.S. have also declined.
This reduction in spending has affected businesses, leading to constraints in manufacturing. A separate report from the Fed revealed a slight increase of 0.1% in factory production for June, following a 0.3% rise in May. Tim Quinlan, a senior economist at Wells Fargo, stated, "Continued uncertainty around trade policy is hindering many businesses from committing to new capital expenditures, as they remain unsure about the policy and demand environment." He emphasized that a manufacturing breakout is unlikely while these uncertainties persist.
President Trump announced last week that higher tariffs would take effect on August 1 for imports from various countries, including Mexico, Japan, Canada, Brazil, and the European Union. Economists predict that these tariffs will keep goods prices elevated through the end of the year, although slower growth in service prices may help offset some of the impact.
In June, portfolio management fees rebounded by 2.2%, alongside price increases across sectors such as machinery, equipment, parts and supplies wholesaling, furniture retailing, and apparel retailing. With the recent PPI and CPI reports, economists estimate that the core Personal Consumption Expenditures Price Index rose by 0.3% in June, following a 0.2% increase in May. Year-over-year, core PCE inflation is anticipated to have advanced to 2.8% last month, up from 2.7% in May. This core PCE price index is crucial for the Federal Reserve's inflation target of 2%.
Bill Adams, chief economist at Comerica Bank, noted that the inflationary impact of tariffs is likely to increase in the coming months. However, he cautioned that weak business pricing power may continue to mitigate the overall effect on inflation.
