US Price Pressures Feed Inflation Worries

What Has Been Driving Markets this week?

On Thursday, the US Producer Price Index (PPI), which is an inflation indicator that tracks what businesses pay for goods, jumped 0.9% month-on-month. This marked the sharpest monthly rise in more than three years and came in more than four times what economists had expected - a clear sign that inflationary pressures persist in the US.

Think of it like your local café suddenly paying more for coffee beans, milk, electricity, and delivery vans all at once. If those higher costs persist, they tend to be passed down the chain, meaning consumers eventually pay more too, increasing consumer price inflation.

Since President Trump announced his trade tariffs, many economists have expected inflation to rise in the US. This is because tariffs make imported goods more expensive, forcing businesses to pay more for inventory or materials. The PPI figures over the past year reflects this trend, ticking higher as Trumps tariffs took effect:

What Was the Market Reaction?

Markets reacted swiftly to the US inflation data:

US equity markets, which had been hovering near record highs, slipped on the news, as investors worried that tighter monetary conditions could linger.
Bond markets were relatively unaffected, with the yield (which moves inversely to price) on the 2-year US Treasury up 0.03%.
The US dollar strengthened, gaining ground against most major currencies after months of depreciating. Yet, to put these moves in context the dollar still remains down by 9.5% year to date versus a basket of developed market currencies.

Where do we go from here?

With tariffs still in place and businesses facing higher costs, the risk is that these price pressures could filter further into the wider economy. If companies keep passing on higher costs to customers, we could see consumer prices climb again later this year. That would likely keep markets on edge, as investors weigh the impact on spending, company profits, and the overall pace of economic growth.

The Noise

UK Economy
In the second quarter of 2025, the UK economy grew by 0.3%, beating expectations of only 0.1% and easing fears of an outright slowdown. The stronger-than-expected GDP growth gives the Chancellor some early breathing room. After weeks of market chatter about a potential UK slowdown, this data helps support her message that the economy is stabilising under Labour’s watch.

US Fiscal Policy
After the PPI inflation surprise, traders scaled back expectations for a sharp September rate cut. While there’s still a high chance of a modest 0.25% cut, the likelihood of a larger move has faded. Traders are now pricing in a 93% chance of a 25-basis point cut from the Fed in September.

Cryptocurrency markets
Bitcoin, the most popular cryptocurrency in the unregulated market, surged to a fresh all-time high reaching $124,000 this week. This rally signals that investors remain eager for highly speculative assets, reflecting a broader market appetite for higher-risk, higher-reward opportunities outside of traditional asset classes such as equities and bonds.