Wholesale inflation saw its sharpest drop since the start of the COVID-19 pandemic, indicating that U.S. tariffs have not yet impacted consumer prices as feared. In April, the producer price index (PPI), which measures what businesses pay for goods and services at the beginning of the supply chain, fell by 0.5 percent. This was contrary to the consensus forecast, which had predicted a 0.2 percent increase.
The Bureau of Labor Statistics recently released data showing that annual headline PPI inflation slowed significantly to 2.4 percent from 3.4 percent, slightly below the market’s estimate of 2.5 percent. Meanwhile, core wholesale prices, which exclude the volatile food and energy categories, also saw a decline of 0.4 percent in April. This was a notable drop from the previous month’s 0.4 percent increase, which had been revised upwards.
Core PPI inflation also eased to 3.1 percent year over year, down from 4 percent, aligning with market expectations. Economists closely watch the PPI as it can indicate pipeline inflation, affecting consumer prices down the road. The Federal Reserve, in particular, monitors these numbers closely since they contribute to the personal consumption expenditure (PCE) price index, which is the central bank’s preferred measure of inflation.
Later this month, PCE inflation is expected to be around 2.2 percent, according to the Cleveland Fed’s Inflation Nowcasting model estimate. The annual inflation rate has slowed to a smaller-than-expected 2.3 percent, marking the lowest level since February 2021. Core CPI inflation remained unchanged at 2.8 percent, providing some relief amidst fears of stagflation.
Despite concerns about stagflation—a mix of high inflation, unemployment, and slow growth—these recent numbers should ease some of those worries. Jamie Cox, a managing partner at Harris Financial Group, commented that the data does not support fears of stagflation. He noted that while growth is slowing, the trend of disinflation appears to be holding steady.
However, economists warn that the impact of tariffs may begin to show in the data during the second half of 2025. Richard Moody, chief economist at Regions Financial Corporation, pointed out that while pauses and deals might have provided temporary relief, higher tariff rates could eventually affect retail prices. Moody suggested that in the coming months, data on goods prices would likely reveal more about tariffs’ impact.
Other analysts believe that inflation might pick up again, though perhaps not as severely as once anticipated. Bill Adams, chief economist at Comerica Bank, noted that inflation could rise in the latter half of 2025 as businesses pass on tariff costs to consumers. However, he also mentioned that after recent tariff cuts, the impact might be less significant than previously thought.
Adams highlighted that tariff-related price pressures might be more manageable for businesses and consumers than initially expected. BNP Paribas economists predicted that U.S. inflation would begin to rise noticeably in the third quarter. They foresee the annual inflation rate surpassing 3 percent and peaking at 4 percent by the second quarter of 2026.
Federal Reserve Chair Jerome Powell has echoed sentiments that tariff-driven price pressures might be temporary. A variety of consumer surveys have shown that households are increasingly worried about a potential inflation resurgence. The University of Michigan’s Consumer Sentiment Index revealed rising short- and long-term inflation expectations.
The New York Fed’s Survey of Consumer Expectations also confirmed these growing short-term concerns, with the median year-ahead inflation outlook increasing to 3.6 percent from 3.1 percent. Corporations have also signaled potential price hikes in response to tariffs. Walmart, for instance, reported a dip in first-quarter profits and indicated that it would need to pass some tariff costs onto consumers.
Walmart CEO Doug McMillon explained that while they strive to keep prices low, the magnitude of the tariffs makes it challenging to absorb all costs. Similarly, Stanley Black & Decker announced price increases in U.S. retailers and plans for further hikes. CEO Donald Allan stated that they are making supply chain adjustments to mitigate tariffs’ impact while maintaining business vitality.
These developments have led investors to reassess their interest rate forecasts. The CME FedWatch Tool indicates that the futures market now anticipates a quarter-point rate cut in September. Previously, traders expected the Federal Reserve to resume its easing cycle as early as June or July.
Recent retail sales data has shown a 0.1 percent increase in April, with March figures revised upward to 1.7 percent. This suggests that monetary policymakers might remain cautious in altering rates, as Jeffrey Roach, chief economist for LPL Financial, noted that steady consumer incomes could support discretionary spending. In remarks, Powell highlighted that long-term interest rates are likely…
