By Jeffry Bartash
Consumer and wholesale prices ticked up in July
Americans are tired of high inflation.
The biggest increase in wholesale prices in three and a half years stunned Wall Street, but is tariff-related inflation really set to soar? The proof is far from ironclad.
The latest pair of inflation reports, to be sure, were not reassuring. A key measure of consumer prices showed the largest advance in six months and pushed the yearly rate back above 3%.
Just six months ago – before the U.S. trade wars – the rate of inflation was widely expected to slow this year to close to the Federal Reserve’s 2% goal. Not anymore.
More worrisome was the biggest surge in wholesale prices since 2022. These prices reflect what businesses charge each other, and when their own costs rise, they tend to pass that on to consumers.
Ergo, inflation.
The consumer-price index, however, has a far better track record in figuring out how much prices are rising for American consumers. And what it showed was a gradual increase, not a sudden spike, in inflation.
What price tariffs?
Most companies, it turns out, have been reluctant to raise prices. Americans are tired of inflation and they are more resistant to price increases, forcing firms to adopt an array of strategies.
The planning began even before President Donald Trump raised U.S. tariffs to the highest level in decades.
Starting after the November 2024 election, companies stocked up on goods and supplies before tariffs took effect, giving them room to keep prices steady.
Others have been waiting to see where tariffs rates would settle and how much their own costs would rise before trying to stick it to consumers.
Still others have eaten some of the cost of tariffs, a luxury they can afford because of record profit margins that have fueled the stock-market rally.
The result: Consumer prices have only risen piecemeal in 2025.
The big wart in the July CPI report was a larger rise in the so-called core rate that strips out food and energy. The core rate is a better predictor of future U.S. inflation.
Even so, the core rate also showed just a mild acceleration in inflation. The 12-month core rate has climbed to 3.1% from a postpandemic low of 2.8% several months ago.
Services surprise
What was somewhat surprising, though, was that the increase in consumer prices in July was twice as high for services as for goods. A similar pattern was evident in wholesale prices.
What’s the deal?
Service prices are far less vulnerable to tariffs. If tariffs are pushing up prices, the effects should be quite visible in the cost of goods – cars, clothing, consumer electronics and so forth.
The relatively muted increase in goods prices suggests limited pass-through from tariffs so far. That’s the good news.
The bad news was the reacceleration in services prices. They had been slowing steadily this year and helping to keep inflation contained.
“It makes me a little uneasy, because that is not likely caused by tariffs,” Chicago Federal Reserve President Austan Goolsbee said in an interview with CNBC Friday. “I hope it’s just a blip.”
The outsize increase in wholesale prices in July, meanwhile, offered more reason to worry. But the producer-price index is more erratic, less reliable and often prone to feints.
Before the July spike, for example, wholesale prices were basically unchanged from March to June.
The July PPI report can’t be dismissed, though. It did indeed contain evidence of tariff-related inflation. Wholesale prices rose for coffee, furniture, appliances, metals and electronics – products that are heavily imported and subject to higher U.S. duties.
“Tariffs are causing businesses to raise the prices they charge each other, which will show up in higher consumer prices over time,” said Bill Adams, chief economist at Comerica Bank in Dallas.
Yet the report also contained some peculiar increases that raise questions about the trajectory of inflation and leave open the possibility the Fed will still cut interest rates next month.
The cost of food, for example, was one of the biggest contributors to the rise in wholesale inflation in July. Vegetable prices alone saw a 39% increase – an unusually high number that will surely retreat soon.
Most food consumed in the U.S. is produced in the U.S., so it seems unlikely that tariffs will drive a sustained increase in food prices.
Trade trouble
The surge in wholesale prices was also driven by a dubious category known as trade margins that economists have long distrusted. This category saw a steep 2% increase last month that was also the largest since 2022.
Let’s break trade margins down. Assume a retailer pays $10 apiece for boys’ shirts and sells them for $15. The margin is 50%.
If the retailer starts to charge $18 for these shirts, the margin would rise to 80%. It would then show up in the PPI as an increase in trade margins.
Higher tariffs should have the opposite effect – they should result in falling trade margins if retailers have to pay more to buy imported goods and they end up swallowing the cost.
But that’s not what is happening. Trade margins have risen this year.
One possibility – a negative one – is that the rise in trade margins means businesses are confident they can pass on their own higher costs to consumers.
If so, rising tariff-related prices should start to show up soon in the consumer-price index, even if not at the alarming level shown by the PPI.
“This [PPI] series is volatile during the best of times, but this is a little difficult to ignore,” said senior economist Jennifer Lee of BMO Capital Markets.
The upshot: There’s little sign of a major surge in prices, but inflation is likely to keep rising.
-Jeffry Bartash
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
08-16-25 0830ET
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