On Aug. 14, an economic data point that I pay close attention to was released. The Producer Price Index for July showed that business input costs surged 0.9%, the highest monthly gain since June 2022. Year over year, the PPI is up 3.3%.
As you've heard me say before, the prices producers pay now translate to the prices consumers pay tomorrow. We are all familiar with the increased tariffs, but the big question has been how much U.S. businesses will pass on to consumers. If only a handful of goods or services were subject to high tariffs, economists would not be as concerned since the prices we pay would not rise across the board.
The issue is that the tariffs are, indeed, across the board with an 18.6% average rate in August versus the 3.3% rate in 2024. That makes it hard for consumers to substitute pricier goods and services with lower-cost ones.
Looking at the details, there was a powerful upswing in services costs, which spiked 1.1% in just July. That accounted for more than three-quarters of the overall increase.
The Federal Reserve focuses on services, because most of the U.S. economy is service-based. Trade margins, especially around machinery and equipment, also were key contributors. Goods prices rose 0.7%, with a jump in food prices accounting for 40% of that increase. American farmers have reported migrant worker shortages as a key factor in rising costs.
Large businesses like Home Depot, Procter & Gamble and Adidas have announced they will no longer be able to absorb all of their increased prices and will have to pass along more to consumers. According to Goldman Sachs, through June businesses passed on only 22% of increases, but they project that consumers' share will rise to 67% if nothing changes.
Interestingly, luxury brands like Ralph Lauren and Coach have stated they have successfully raised prices as higher-end consumers are able to absorb them amid strong stock portfolios and appreciating assets.
While the Producer Price Index data can be volatile month to month, the nearly 20% tariff rate is likely to provide continued pressure on business and consumer prices. I especially worry about smaller businesses that say they are struggling with the additional regulations and paperwork required under the new tariff regime.