US Producer Prices Surge, Clouding Fed Rate Cut Outlook

The July producer price index from the US showed its largest three-year increase which indicates rising inflationary pressures that could challenge Federal Reserve expectations for a rate cut in September. The Labor Department announced that producer prices increased 0.9% during July because goods and services costs rose substantially beyond the 0.2% forecast made by economists.

Food prices surged 1.4%, fueled by a near 39% spike in vegetable costs, while metals and other industrial inputs also climbed. The services sector experienced its largest price increase since March 2022 with a 1.1% rise which was driven by higher costs for machinery wholesaling and portfolio management and lodging and freight.

The report followed data earlier in the week showing consumers paid more for services such as dental care and airfares. Economists believed that lower services inflation would balance out the price increases from tariffs which resulted from President Donald Trump's import levies.

The PPI rose 3.3% year-over-year, up from 2.4% in June. The analysts predicted that businesses would start transferring their tariff expenses to customers which would drive inflation rates up throughout the rest of the year.

The market began the day with declining stock prices while Treasury yields increased and the dollar gained strength because investors reduced their expectations for a substantial September rate cut.