U.S. Inflation Report Highlights Decline in Travel Expenditure and Rise in Cost of Goods
The latest data from the U.S. Bureau of Labor Statistics indicates that wholesale inflation remained relatively stable in June, with the Producer Price Index (PPI) remaining unchanged month-over-month and posting a deceleration of 2.3% year-over-year. This outcome is somewhat counterintuitive given the implementation of significant tariffs by President Donald Trump on global trading partners.
However, a notable decrease in travel and other services appears to have concealed an increase in the cost of goods. Economists had anticipated that prices would rise by 0.2% monthly and 2.5% annually, but the actual figures fell below these expectations.
The absence of broader inflation in June was attributed to a waning demand for manufactured goods, as stated by Bill Adams, chief economist for Comerica Bank, in a note issued on Wednesday. The core PPI, which excludes volatile components such as food and energy, also remained static from May, with an annual rate decelerating from 3.2% to 2.6%.
A more concerning monthly inflation report, the Consumer Price Index (CPI), was published earlier this month, demonstrating a rise in prices across various sectors, including tariff-sensitive industries. This latest PPI report provides a complex picture of the U.S. economy amid ongoing trade tensions, as businesses, consumers, and the central bank grapple with the implications.
Joe Brusuelas, chief economist at RSM US, described Wednesday’s report as a “classic head fake.” The overall index was influenced by a 2.7% drop in airline passenger services and a 4.1% decrease in travel accommodation services (hotels and motels), which Brusuelas attributes to a reduction in international travelers visiting the United States.
Despite an increase in gas prices, falling service prices—particularly in sectors such as travel, accommodations, and car dealerships—contributed to a lower overall index. This may suggest that consumers have curtailed some discretionary spending due to economic uncertainty.
Brusuelas cautioned against interpreting the decline in demand for travel services positively, stating that it signifies weaker tourism, which can have ripple effects throughout the retail, leisure, and hospitality sectors.
The 0.1% drop in wholesale services prices masked gains on the goods side. Finished consumer goods prices, for example, increased by 0.4% in June, accelerating from a 0.3% rise in May. Trade services also remained unchanged, placing downward pressure on the overall index by signaling squeezed profit margins for wholesalers and retailers.
Rising tariffs are resulting in thinner margins that may necessitate increased price pass-through to customers in the future, according to Brusuelas. Although this phenomenon has yet to be evident in the airline sector, it is starting to emerge elsewhere.
The extent to which businesses can successfully transfer these costs to consumers remains uncertain, with skittish consumer demand potentially limiting pricing power, as noted by Adams of Comerica Bank. The PPI may serve as a potential indicator for price changes that consumers might experience in the coming months.
