US producer price inflation bounced in July to its highest reading since 2022, data showed Thursday, with underlying signs that businesses are facing pressures from President Donald Trump's tariffs.

The rise in services costs exceeded that in goods, contributing to a markedly larger advance than analysts expected.

But economists noted that the headline increase might be overstated — boosted by a range of volatile factors — even as there are also price gains in goods exposed to tariffs.

The producer price index (PPI) rose 0.9 percent on a month-on-month basis after a flat reading in June, said the Department of Labor.

A Briefing.com analyst consensus forecast expected a much smaller jump of 0.2 percent.

The PPI measures changes in producers' prices, and the report is seen by some as a bellwether for what consumers could face in the months ahead if firms choose to pass on more costs.

On Wall Street, all three major US indexes retreated after the report.

Businesses have been grappling with Trump's sweeping tariffs after he targeted most trading partners with a 10-percent levy this year, alongside steeper levels on sectors like steel and aluminum.

The latest numbers took the overall PPI figure to 3.3 percent from a year ago, said the Bureau of Labor Statistics.

The cost uptick in goods was 0.7 percent while that of services was 1.1 percent — marking the biggest such jump since March 2022 as well.

While the advance was "broad-based" in July, more than three-quarters can be traced to services, the Labor Department said. 

Much of this was due to trade services, relating to changes in margins for wholesalers and retailers. Economists noted this was a sign that trade disruptions are hitting supply chains, though trade services are also a volatile component.

Prices for final demand goods made a big advance too, with 40 percent of the July increase traced to foods.

Fed dilemma

All of this complicates the Federal Reserve's job as it seeks to balance inflation risks with the health of the labor market in mulling the right time for the next interest rate cut.

Fed policymakers have been monitoring the impact of tariffs on consumer inflation, with some officials arguing the hit will be one-off and others cautious about more persistent effects.

"Input costs for producers jumped in July as price pressures for businesses build from compounding tariff impacts," said Nationwide senior economist Ben Ayers in a note.

"While businesses have assumed the majority of tariff costs increases so far, margins are being increasingly squeezed by higher costs for imported goods," he added.

He said that tariff price hikes were most obvious within metal and food categories, with readings for steel and aluminum — both targeted with 50-percent levies — jumping in recent months and adding to cost concerns for manufacturers.

Ayers expects more of the tariff burden borne by companies so far to pass through to consumer prices in the coming months.

"Tariff-exposed goods are rising at a rapid clip, indicating that the willingness and ability of businesses to absorb tariff costs may be beginning to wane," added Matthew Martin, senior US economist at Oxford Economics.

The effects of Trump's tariffs on consumer inflation have been limited for now, with a key gauge -- the consumer price index -- steady at 2.7 percent in July.

This, combined with government employment data showing that recent hiring numbers were significantly weaker than estimated, has raised the odds of a September rate cut by the central bank.

Martin said the PPI data "provides a counter-balance to these reports" and highlights the Fed's dilemma.

"The big picture remains that inflation is further away from the Fed's target than the unemployment rate and is likely to climb further over the coming months," he said.

"The path forward will have to traverse a tight rope between the next employment and price reports," Martin added.

by Beiyi Seow