Quick Read Key Points

  • Data released by the U.S. Bureau of Labor Statistics on Thursday showed that the Producer Price Index (PPI) rose 0.9% month-over-month and 3.3% year-over-year in July, the fastest pace in three years. Analysts believe that tariff costs, at their highest levels since the 1930s, are beginning to transmit along the supply chain.
  • PPI measures wholesale selling prices. The July increase exceeded market expectations, and the Bureau of Labor Statistics noted in its report that tariff impacts are spreading from the wholesale sector to the retail end.
  • St. Louis Fed President Alberto Musalem said in a CNBC interview, "Now tariffs are transmitting." Citing corporate feedback, he added, "Firms tell us it takes about three to six months to pass on the costs of import tariffs. We are now at roughly the three-month mark."

In-Depth Analysis

Musalem and other Fed officials are facing a set of economic data that conflicts with the dual mandate given by Congress—price stability and maximum employment. The labor market has recently weakened noticeably, with the three-month average of new nonfarm payrolls falling from 127,000 between February and April to just 35,000.

Meanwhile, core inflation, which excludes volatile food and energy prices, rose 3.1% year-over-year in July, up from 2.9% in June. Data released by the Bureau of Labor Statistics on Tuesday showed that rising costs in services such as transportation and healthcare were the main factors pushing up core inflation.

Musalem noted that recent data indicates inflation remains about 1 percentage point above the Fed's 2% long-term target. He expects "it will take another two to three quarters for the full impact of tariffs to materialize," and said, "I expect most of the impact will fade over time, but there is some probability of persistence, and we need to better understand that."

When setting monetary policy, central bank officials must balance curbing inflation above target against preventing a rise in unemployment. Musalem said, "There must be a trade-off between the labor market and inflation mandates." He added that he has not yet decided whether the Fed should adjust its key interest rate at the next policy meeting.

Traders in the interest rate futures market believe the Fed is more likely to lean toward preventing labor market weakness. According to the CME FedWatch tool, traders on Thursday estimated a 93% probability that policymakers will cut interest rates by 25 basis points at the September 16-17 meeting.

Atlanta Fed President Raphael Bostic said on Wednesday that policymakers should take time to assess the latest data before deciding whether to adjust the federal funds rate. He said, "The worst moments for Fed policy are often when it acts and then changes its mind, moves in the opposite direction, then changes again and reverses course." He recalled, "We experienced this in the 1970s. Inflation failed to subside for a long time, and this kind of back-and-forth actually caused distress for the public."

Bostic believes that with the unemployment rate at an unusually low 4.2%, the health of the labor market gives policymakers the "luxury" of time to clarify the best path for monetary policy. He said, "The labor market is quite strong, so our maximum employment mandate is not as at risk as the inflation mandate. I feel we have room to maneuver now."

Correction: A previous version of this article incorrectly stated Alberto Musalem's title; it has been corrected to St. Louis Fed President.