Producer Prices Jump, But CPI Stays Cool (For Now)
PPI Data
The latest Producer Price Index (PPI) data is in, and it’s running hotter than expected. July’s PPI, which measures prices at the wholesale level, jumped 0.9% month-over-month (expectations were just 0.2%). On an annual basis, prices rose 3.3%, the biggest increase since February. Even “core” producer prices — which strip out volatile food and energy — saw their largest jump in three years.
Where’s the heat coming from? Pockets of price pressure are showing up in food, metals, and services. The biggest mover: wholesale vegetable prices, which surged 38.9%.
The Economics Behind It
If producer prices are surging, why hasn’t the Consumer Price Index (CPI) followed? Shouldn’t customers start feeling the heat, too?
For now, many businesses are absorbing the higher input costs instead of passing them on to consumers. However, that is not necessarily something to celebrate. When firms face higher costs without raising prices, their profit margins shrink. Over time, that can mean:
Fewer choices for consumers (cutting back on products or services)
Fewer jobs if companies trim payrolls to offset costs
Why the delay in raising prices? One big reason: menu costs. Changing prices isn’t just a matter of updating a number; it’s an expense to the firm and the customer. Businesses have to decide when to raise prices, how often, and by how much. Businesses face:
Direct costs: new menus, labels, price tags, website updates, ad campaigns
Indirect costs: negative customer reactions or lost sales if price hikes scare buyers away
These frictions contribute to price stickiness, the tendency for prices to adjust slowly to changing market conditions. Firms may also wait to see whether input costs are temporary before locking in higher prices for customers.
The Bottom Line
Today’s hot PPI reading is a reminder that inflationary pressures often show up at the wholesale level before hitting consumer prices. Businesses can absorb those costs for a while, but eventually, someone pays, and it could be in the form of higher prices, fewer product options, reduced job opportunities, or lower shareholder value.
With wholesale prices still running high and far above pre-pandemic levels, the probability that the Federal Reserve will cut interest rates at its next meeting decreased. High input costs risk reigniting consumer inflation, and the Fed will want stronger evidence of cooling prices before loosening policy. With that said, the market is still predicting a 92% chance that the Fed will reduce interest rates by 25 basis points in their next meeting, 33 days from now.
If you’re budgeting for the rest of the year, don’t just look at the CPI. Pay attention to producer prices too, they’re often the early warning signal for what’s coming next.
We can add "political pressures" to our economics list of reasons for prices to be sticky!
I have a running theory that many companies are eating the cost for now because it has become political. The current administration has already attacked companies for stating the negative effects of the tariffs. I think many major firms are waiting for their competitors to buckle first then raise their prices. Then they can say they are following the industry trend.