Businesses Are Paying More, So Guess Who’s Next in Line?

The Producer Price Index (PPI) rose 0.9% in July, blowing past expectations for a 0.2% increase. That marks the largest monthly gain since March 2022.

The shock was broad: wholesale goods rose 0.7%, and services surged 1.1%.

The report included eye-catching jumps in food, electronics, and even financial services.

Egg prices climbed over 7%, beef rose nearly 5%, and wholesale costs for TVs, appliances, and portfolio management services all saw multi-point gains.

The message is that tariff impacts are no longer a maybe. They are hitting upstream, with clear signs they could trickle into downstream consumer prices by fall.

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Fed Rate Cut Debate Gets Cloudier

Until this report, most of the market expected the Fed to cut interest rates in September. Now, that forecast is less certain. While traders still lean toward a rate cut, futures markets have dialed back expectations slightly.

Economists now estimate the Fed’s preferred inflation metric, the core Personal Consumption Expenditures (PCE) index, may have climbed to 2.9% in July from 2.8% the month prior. That nudges inflation further from the Fed’s 2% target and could force policymakers to wait.

St. Louis Fed President Alberto Musalem said the report “shows risks that inflation could be more persistent,” though he added that labor market concerns still weigh heavily.

The Fed will receive one more jobs report and one more inflation update before its September meeting. But as of now, the path forward is foggy.

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Business Impact: Margins in the Crosshairs

Wholesale inflation is upstream pain for companies. If they can’t pass along higher input costs, margins will get hit. This creates a tricky setup for Q3 earnings season.

Some sectors are better positioned than others:

• Consumer staples may absorb cost hikes better due to steady demand and pricing power.

• Discretionary retail, especially in categories like furniture and electronics, may struggle as price-sensitive consumers pull back.

• Industrials could face pressure as tariffs raise input costs while infrastructure timelines remain fixed.

• Tech hardware margins are at risk unless companies have secured tariff exemptions or shifted production.

Even service firms are feeling the squeeze. Financial services costs rose sharply in the report, with brokerage and portfolio management fees seeing unexpected inflation.

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*Past performance is no guarantee of future results. Investing involves risk. This material does not constitute investment, legal, accounting, or tax advice. Zacks Investment Research is not a licensed dealer, broker, or investment adviser.

Portfolio Strategy is to Prepare, Not Panic

This is not a reason to make wholesale changes to your portfolio. But it is a reason to check your exposure.

Here’s how to think about positioning in this new stage of the inflation cycle:

• Evaluate companies with fixed input costs and variable pricing flexibility. Margin management will be key.

• Focus on domestic supply chains. Tariff-exposed global models are under pressure, especially in retail and tech.

• Be careful with rate-sensitive growth stocks. If the Fed stays cautious, cost of capital remains elevated.

• Add exposure to quality balance sheets. Cash-rich firms can navigate pricing disruptions better than over-leveraged peers.

• Watch for rotation into inflation hedges. Select commodity producers and logistics firms may benefit as costs rise.

Top Takeaways

✅ PPI surged 0.9% in July, the strongest monthly jump since March 2022
✅ Tariff effects are showing up in upstream data, with food, electronics, and services all rising sharply
❌ Rate cut odds for September have slipped, with core PCE now projected to rise to 2.9%
❌ Corporate margins could come under pressure in Q3 as costs rise and pricing power is tested
✅ Investors should stay agile and recheck inflation exposure across sectors

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