KEY POINTS
- Wholesale costs, as measured by the Producer Price Index (PPI), are rising at their fastest pace in three years, which could lead to future price increases for consumers.
- Businesses are beginning to pass on increased costs from tariffs and other supply challenges to consumers, a trend that could reignite inflation.
- The potential for rising inflation poses a challenge to the administration’s desire for the Federal Reserve to lower interest rates, as the central bank is unlikely to cut rates if consumer prices accelerate.
New reports indicate a divergence in inflation trends, with consumer prices remaining relatively stable while wholesale costs, particularly for businesses, are on the rise, signaling potential future price increases for consumers. The Producer Price Index (PPI), which tracks what businesses pay for raw materials, climbed 3.3% year-over-year in July, marking its fastest pace since June 2022, the height of the post-pandemic inflation surge.
Understanding Inflation Trends
While consumer inflation, the kind directly experienced by individuals, has been described as relatively mild, certain sectors have seen price increases. Housing and meat, for instance, have become more expensive, while the cost of gasoline has decreased. This aligns with recent data showing the Consumer Price Index (CPI) saw a slight increase, rising to 2.7% year-over-year in June 2025 from 2.4% in May, while the Core CPI, which strips out volatile food and energy prices, remained elevated at 2.9%.
However, wholesale inflation, which impacts businesses’ production costs, presents a different picture. The July PPI increase indicates that businesses are facing higher expenses, a trend that could eventually translate into higher prices for goods and services purchased by consumers.
The Growing Impact of Tariffs
Businesses have reportedly been absorbing the increased costs associated with tariffs, partly due to expectations of policy changes and a desire to avoid public criticism. This trend, however, appears to be shifting, with companies beginning to pass these costs onto consumers. Economists generally agree that tariffs are paid by American businesses, who then often pass these expenses along to consumers. As Peter Boockvar, chief investment officer at Bleakley Financial Group, noted, “Tariffs don’t somehow disappear into the ether. And if consumer prices don’t accelerate from here, we have a profit margin hit on our hands. Pick your poison.”
This dynamic is unfolding against a backdrop of resilient economic activity. After a 0.5% contraction in the first quarter, real Gross Domestic Product (GDP) rebounded strongly, increasing at an annual rate of 3.0% in the second quarter of 2025, and a narrowing trade deficit that decreased to $60.2 billion in June 2025, from $71.7 billion in May.
Broader Economic and Political Pressures
Beyond tariffs, other factors are contributing to cost pressures. Housing prices, for example, are elevated largely due to a long-standing shortage of available homes in desirable areas, a situation with little connection to global trade dynamics. Additionally, prices for staple goods like coffee and eggs have fluctuated due to issues such as adverse weather conditions. These existing supply challenges are expected to persist, potentially exacerbating the impact when the full effects of tariff-related costs are felt by consumers.
The potential for rising prices to significantly impact consumers could occur at a politically sensitive time, particularly for the Republican party as midterm elections approach next year. The unemployment rate stood at 4.1% as of March 2025. Public approval for the President’s job performance has shown a decline, with a recent Pew Research poll indicating 38% approval and 60% disapproval. The same poll also suggests that two major policy initiatives, tariffs and the “One Big Beautiful Bill Act” (a tax and spending law), garner “considerably more disapproval than approval.” Even before the full price impact of tariffs has reached consumers, 61% of Americans already disapprove of the policy.
The economic implications of tariffs also pose a challenge to the administration’s desire for the Federal Reserve to lower interest rates to stimulate economic growth. The central bank is unlikely to cut rates if inflation continues to rise, despite President Trump’s statement at a White House event that inflation is “down to a perfect number.” Analysts are, however, still anticipating a cut in the federal funds rate in September.
