Inflation alarm bells went off again and prices are rising. Just how bad is it going to get?

July economic reports revealed significant increases in both consumer (CPI) and wholesale (PPI) prices, with annual CPI exceeding 3% and PPI seeing its largest surge since 2022. While some wholesale price hikes were tariff-related, the notable reacceleration in non-tariff-sensitive services inflation is a key concern. Companies have largely absorbed tariff costs on goods to date, but rising wholesale trade margins suggest an anticipated pass-through of higher costs. This indicates inflation is likely to continue rising, challenging prior expectations of a slowdown, though the PPI's volatility and specific non-tariff-related increases complicate the near-term inflation trajectory and potential Federal Reserve actions.

Analysis

July's economic data reveals a complex and concerning inflation picture, marked by the largest wholesale price surge since 2022 and a consumer price index (CPI) pushing the annual rate back above 3%. While a portion of the producer price index (PPI) increase can be attributed to tariffs affecting imported goods like furniture and electronics, the pass-through to consumers has been limited thus far, as companies have leveraged high profit margins and pre-election inventory stocking to absorb costs. A more significant development is the reacceleration in services inflation, which rose at twice the rate of goods inflation and is a source of unease for the Federal Reserve as it is not directly tariff-related. The core CPI, a key predictor of future trends, has also climbed to 3.1% from a recent 2.8% low. The headline PPI number is further complicated by volatile components, including a 39% monthly jump in vegetable prices and a dubious 2% rise in 'trade margins,' which may signal businesses are growing confident in their ability to pass future cost increases on to consumers, challenging the narrative of contained inflation.

Key Decisions for Investors

• Investors should adjust for a higher-for-longer inflation scenario, as the combination of accelerating core CPI and leading signals from the PPI challenges previous expectations of a slowdown towards the Fed's 2% target.
• Monitor the divergence between services and goods inflation, as persistent strength in services prices could indicate broader economic overheating and influence sector allocation away from goods-based consumer discretionary companies.
• Anticipate heightened market volatility around future Federal Reserve announcements, as the conflicting data points from the CPI and the erratic PPI create significant uncertainty for near-term monetary policy.
• Pay close attention to the 'trade margins' component in upcoming PPI reports as a key leading indicator of corporate pricing power and the potential for future cost pass-through to consumers.