The sharp increase in the producer price index in July was a warning not only for the Federal Reserve but also for businesses, as the data suggested that profit margins could soon take a hit.
Producer inflation came in more than double the most pessimistic forecast, sending a clear message that the inflation problem isn’t fading anytime soon.
The top line for final demand rose by 0.9% from June and by 3.3% from 12 months ago. That was a significant increase from June, when producer prices were unchanged on a monthly basis.
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The economy has moved past the first-order effects of tariffs—disruptions to consumer and business behavior through stockpiling and altered spending—and is now confronting the second-order impact on inflation, a risk we have long anticipated.
Equity markets, buoyed in recent months by solid earnings, may face pressure as profit margins shrink after companies absorb tariff costs.
The widening gap between the consumer and producer price indexes—a proxy for margins—signals that rising costs are likely to spill over into retail prices.
Economics textbooks often suggest businesses hesitate to raise prices for fear of losing market share. But tariffs are a widespread shock: They affect nearly everyone and give companies across industries the justification to push prices higher.
