Data released on Friday revealed that the prices businesses pay to one another experienced a significant increase in January, suggesting that additional price hikes related to tariffs may be forthcoming. The Producer Price Index increased by 0.5% last month, marking an uptick from December’s 0.4% rate, as reported. The annual inflation rate decreased to 2.9%, down from 3%. Analysts anticipated a rise in wholesale inflation by 0.3%, leading to an annual rate of 2.6%. US stocks experienced a significant decline on Friday morning, as investors expressed concerns that the unexpectedly high inflation report might prompt the Federal Reserve to maintain its current stance on rate cuts. The Dow experienced a decline of 728 points, representing a decrease of 1.47%. The S&P 500 experienced a decline of 0.8%, while the tech-centric Nasdaq fell by 0.92%. The Producer Price Index, which gauges the average change in prices that producers receive for their goods and services, is closely monitored as a potential indicator of the price trends consumers may encounter in the forthcoming months. “Tariffs are being passed through along the supply chain,” stated Michael Reid. “Consequently, our concern is that this may not signify the conclusion of the pass through.” The complete effect on consumer prices within the goods sector remains to be observed. During the month, gas and food prices experienced a decline; however, these reductions were offset by a significant rise in “trade services,” which assesses profit margins for wholesalers and retailers. Trade services exhibit significant volatility on a monthly basis.
However, this category has garnered significant attention from economists over the past year, as it may indicate whether businesses are managing to absorb the elevated costs that US importers are incurring due to tariffs. Trade services experienced a notable increase of 2.5% in January, suggesting a possible transmission of costs to other businesses and consumers. Several industries experienced notable growth in trade services, including apparel, footwear, chemicals, wired telecommunications, health, beauty and optical products, along with certain food and alcohol sectors. “These are all factors for which consumers bear the cost, either directly or indirectly,” Reid stated. The core PPI gauge, which serves as an indicator of the underlying inflation trend, exhibited a notable increase when food and energy are excluded. Prices increased by 0.8%, compared to 0.6% in December, resulting in an annual rate of 3.6%, the highest observed in the past 10 months.
Additional information in Friday’s report reinforced the notion that President Donald Trump’s significant and extensive tariffs persist in elevating costs for US businesses, which subsequently results in increased prices for consumers, Reid stated. He noted that prices of finished consumer goods, excluding food and energy, continued to increase, reaching an annual rate of 3.4%. This marks the highest year-over-year inflation rate for that category in over two years, coinciding with the period when goods were tapering off from the inflationary surge experienced during the pandemic. Furthermore, when excluding trade (margins), transportation, and warehousing prices, inflation in the services sector remained stable. “In this environment, when considering services, particularly those that do not encompass trade-related services, there is no (price) pressure present,” he stated. Reid indicated that the increase in wholesale prices is likely to result in higher costs for consumers regarding goods and services; nevertheless, the alternative presents its own challenges. “We may not necessarily observe a marked increase in the prices for these consumer goods, but that would imply margin compression within the sector; and in that context, if higher prices do not materialize, there is a risk of more substantial layoffs,” he stated.
Numerous factors contribute to the gradual emergence of tariff-induced price increases, often delayed for months following their implementation. A primary factor is that companies stocked their warehouses with goods prior to the tariffs, subsequently depleting that inventory throughout much of the previous year. Furthermore, the unpredictable character of Trump’s trade policies has led to a diverse strategy regarding the timing and selection of products subject to tariffs. The recent developments – the Supreme Court’s decision indicating that Trump overstepped his authority regarding certain tariffs, the president’s ensuing 15% global tariff response, and the anticipation of additional tariffs – may establish another opportunity for businesses to front-load. Nevertheless, Reid noted that the overall narrative surrounding trade and tariffs is not anticipated to shift significantly.