By Mike Horrigan, President, Upjohn Institute for Employment Research
Consumer price inflation has been relatively well-behaved recently, staying below 3 percent year-over-year in 12 of the last 13 months. After pandemic-era supply chain shocks pushed up goods prices through mid-2022, services inflation became the main driver from early 2023 onward. Even that pressure has eased: services prices rose 3.8 percent in July, down from rates above 5 percent between March 2022 and May 2024. Commodity prices, by contrast, were up only 0.7 percent in July, although higher than its relatively flat trend since February.
Tariffs may eventually lift consumer prices, but Consumer Price Index (CPI) data show little effect so far. Perhaps the better signal lies not with consumer prices but with producer prices, which often foreshadow CPI trends. In July, the Producer Price Index (PPI) for final demand jumped 0.9 percent—the sharpest monthly gain since July 2022.
The PPI for final demand tracks the prices that domestic producers receive for goods and services sold to consumers, businesses, government, and export markets. It includes two main components: final demand goods, reflecting prices for tangible products, and final demand services, reflecting the trade margins wholesalers and retailers earn in delivering those goods to market.
In July, prices of final demand goods rose 0.7 percent, after averaging flat growth from February to June. But this index also spiked in January before retreating, suggesting July may prove to be another one-off.
Services tell a different story. Prices of final demand services rose 1.1 percent in July, accounting for three-quarters of the overall PPI increase. This measure is a “margin index,” capturing the difference between what firms pay to acquire goods and the prices they receive when selling them forward. For example, a grocery store margin is the difference between the transactions received through sales to consumers and the costs of acquiring those goods into store inventory.
A 1.1 percent monthly rise—or nearly 14 percent at an annualized pace—in such margins suggests costs are building in the distribution chain. While it is mathematically possible that falling input costs widened margins, recent increases in CPI goods prices point instead to higher selling costs. If so, the surge in services margins may soon flow through to consumer prices.
In short, July’s PPI report suggests that consumer inflation could re-accelerate, adding to the Fed’s dilemma as it debates interest rate cuts owing to a recently slowing labor market.