Stocks in the United States descend following an increase in wholesale inflation
In a surprising turn of events, the Producer Price Index (PPI) saw an unexpected surge in July 2025, marking a 0.9% monthly increase – the biggest in three years. This rise, as reported by the Bureau of Labor Statistics, has complicated the Federal Reserve's outlook ahead of its September monetary policy decision.
The unexpected PPI increase pushed the annual wholesale inflation rate to 3.3%, significantly above economists’ expectations of a 0.2% rise, and well above the Fed’s 2% inflation target. This spike was primarily driven by costs related to tariffs on imports, which have elevated prices particularly in sectors like household furnishings, electronics, and food products.
Although businesses have absorbed some costs so far, the likelihood that these higher costs will be passed on to consumers is increasing, signaling potential upward pressure on consumer inflation measures such as the Consumer Price Index (CPI) and the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index.
This data has led market and expert commentary to suggest that this surge in wholesale inflation undermines the previously optimistic expectation of a Federal Reserve interest rate cut in September. Instead, the Fed may face added pressure to maintain or even tighten monetary policy to keep inflation in check, despite political pressures to lower rates.
The PPI report has had a noticeable impact on the US stock market. The S&P 500 opened down 0.2% at 6,452.85, while the Dow Jones Industrial Average opened down 0.4% at 44,752.94. The Nasdaq Composite Index opened down 0.1% at 21,702.61.
Chris Zaccarelli, chief investment officer for Northlight Asset Management, stated that the PPI report is a "most unwelcome surprise to the upside." He added that if the market finishes the day flat or higher, it's a strong indication that the market doesn't need rate cuts to keep moving higher.
However, Zaccarelli also noted that if the reaction to the PPI report is extremely negative, it's an indication that this bull market isn't as robust as many have been claiming. He further stated that the PPI report is likely to "unwind some of the optimism of a 'guaranteed' rate cut next month."
It's important to note that the rise in the PPI occurred despite a reading on consumer prices suggesting stable inflation. This suggests that the impact of tariffs on inflation is starting to be felt at the producer level, with the potential for these costs to be passed on to consumers.
Futures markets have been betting that the Fed will cut interest rates in September, but the unexpected PPI surge could change that outlook. The persistence and acceleration of inflation numbers challenge the narrative of a clear, continued inflation decline and indicate a more cautious Fed approach.
In summary, the unexpected surge in wholesale inflation in July 2025 likely reduces the chances of a rate cut by the Federal Reserve in September, increasing the probability of a hold or possible tightening in monetary policy to address inflation risks.
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