US Producer Prices Rise 0.9% in July, Beating Expectations and Complicating Fed Rate Cut Outlook
U.S. producer prices increased more than expected in July, driven by the largest rise in service costs in over three years and a tariff-fueled jump in goods prices. The stronger-than-forecast data raises questions about the Federal Reserve’s willingness to cut interest rates in September.
The Producer Price Index (PPI) for final demand climbed 0.9% month-on-month in July, after being unchanged in June. On a yearly basis, PPI rose 3.3%, up from 2.4% in June — the biggest annual gain since February. Economists had expected a 0.2% monthly rise and a 2.5% annual increase.
Services Costs Surge
The index for final demand services jumped 1.1% in July, the sharpest monthly gain since 2021. Much of the increase came from higher costs in machinery and equipment wholesaling, as well as portfolio management, securities brokerage, traveler accommodation, and freight transportation.
Goods Prices Climb on Tariff Impact
Final demand goods rose 0.7%, the largest increase since January, with about a quarter of the gain linked to higher fresh and dry vegetable prices. Gasoline prices declined, but electronics, sporting goods, and other tariff-exposed categories saw notable price increases.
Excluding food and fuel, core PPI rose 0.4% after a 0.9% gain in June. Passenger car prices slowed to a 0.1% rise, while home electronic equipment surged 5% month-over-month and sporting goods rose 1.2%.
Market Reaction and Fed Implications
Kathy Jones, Chief Fixed Income Strategist at Charles Schwab, called the data “hot,” noting that Treasury yields rose as the Fed will need to weigh the stronger inflation against signs of a softening labor market.
A weak July jobs report and muted consumer price data earlier this week had fueled expectations for a September rate cut — the first since the Fed paused its easing cycle last December. Markets are pricing in a 25-basis-point cut, while Treasury Secretary Scott Bessent has called for a deeper half-point reduction.
Capital Economics estimates that July’s CPI and PPI data push the core personal consumption expenditures (PCE) deflator up 0.32% month-on-month, with the three-month annualized rate rising to 3.2% from 2.7%. Stephen Brown, Deputy Chief North America Economist at Capital Economics, noted that while part of July’s jump was a one-off in portfolio management, the more worrying sign is that “services prices might be accelerating.”
