An Increased Cost of Goods and A Reduction in Travel Spending, Report Shows

 

Amid President Donald Trump’s ongoing, chaotic global tariff rollout, the US wholesale inflation remained stable in June, delivering unexpectedly outstanding outcome. But travel and other services encountered a pull-back that camouflaged a hike in the price of goods.

The Producer Price Index, responsible to track the average change in costs paid to manufacturers, remained unwavering from May, and an annual rate of whole-sale level inflation saw a slowdown of 2.3%, staying down in part due to base effects (as the year ago period faced soaring inflation).

“Higher tariffs rates are elevating the cost of manufactured goods, on the other side, wobbly demand is continuing to tamp down the broader inflation in June,” Bill Adams, chief economic for Comerica Bank, wrote in a note on Wednesday.

Economist had predicted that people will see a 0.2% price hike on monthly basis and 2.5% surge in price annually, according to FactSet.

The Bureau of Labor Statistics published a report on Wednesday, shedding light on the domestic pricing environment for producers, comparing it to May, when PPI 0.3% and 2.7% annual rate increases came into effect, being revised upward.

Core PPI, which doesn’t include the volatile components of food and energy, also remained steadfast from May, underscoring an annual rate slowdown from 3.2% to 2.6%.

The report comes after a more alarming monthly inflation review, the Consumer Price Index, which spotlighted a price hike in June, elevated in part by more high-cost goods in specifically tariff-sensitive industries.

All told, it plagues the picture of the US economy as President Donald Trump’s chaotic global tariff war triggers, driving businesses, consumers, and the central bank to scramble to muddle through the impact.

A ‘head fake’ of a report

Chief economist at RSM US Joe Brusuelas said that the Wednesday’s report is a “classic head fake.”

A steep drop of 2.7% in airline passenger services contorted the overall index, emerging from a pullback of international travelers on their visit to the United States of America, Brusuelas said. A decrease of 4.1% came from travel accommodation services prices (hotels and motels).

Although gas prices continued an upward trajectory in June, dropping service prices at hotels, airlines, and car dealerships kept the overall index low. Travel and leisure prices went down from their typical position, giving a potential indication that consumers have curbed their discretionary spending amid uncertain and volatile economy.

“One should remain strained about the fact that foreign customers are declining to travel to the US,” said Brusuelas. “A pullback in travel spending prompted a drop in demand, causing weak tourism, which impacted the retail complex, leisure, and hospitality, and restaurants.

The wholesale services prices fell 0.4%, disguising gains on the goods side. For example, a surge of 0.4% in finished consumer goods prices happened in June, rising from a 0.3% hike in May.

The prices remained unwavering in the trade services category, exerting downward pressure on the overall index. Trade services track profit margin for both wholesalers and retailers, and it can be fluctuating.

Those margins, which flattened in June, are an explicit indication that businesses weren’t passing some of the higher costs to the consumers.

“The high tariff rates are scaling down the margins and will be compelling the businesses to quit eating the costs at some point,” Brusuelas said. “While you aren’t seeing the airline sector going through it, you’re starting to see it elsewhere.”

However, it’s unclear how much cost businesses pass along to customers. Unforeseeable consumer demand could be curbing the pricing power of the businesses, Comerica’s Adam said in a statement.

PPI delivers services related to price changes as a potential bellwether people would see in upcoming months.