On the heels of a somewhat positive July consumer price index (CPI) report, the recently released producer price index (PPI) generated concern. Wholesale inflation rose 0.9% in July, above economists’ expectations of a 0.2% increase. A cooler CPI report had markets buzzing over a potential Federal Reserve rate cut in September, but the recent PPI figures suggest inflation is on the horizon. 

Read also: U.S. Inflation Surges to 2.7% Amid Tariff Impacts

Economists have long warned that tariffs are taxes and will eventually be passed on to consumers in higher prices. The Trump Administration, to some extent, has avoided this scenario to date, which has confounded analysts and pundits alike. Widespread tariffs have generated additional revenue for the federal government, but according to a recent Goldman Sachs analysis, U.S. importers are paying 64% of the tax burden, 14% is paid by foreign exporters (through lower prices), and the U.S. consumer shoulders 22%. This analysis is more or less consistent with the New York Federal Reserve’s analysis of the tariffs on China during the first Trump Administration. Yet, so far, a sweeping increase in prices across the board has not taken place.

One theory suggests that tariff-driven price hikes are being hidden in the “middle-mile.” Some U.S. importers have pulled forward their freight to mitigate the on-again/off-again tariffs, and the increased inventory resides in the middle mile – the distance between warehouses and distribution centers. Retailer inventories generally peak in mid-October, but due to front-loading, capacity has slightly expanded. Peak season items have been pushed forward by two to three months, and inventories will likely reach retailers’ distribution centers in September and October. 

Excluding food and energy, core PPI is up, reaching the highest level since March. Higher food prices contributed to the increase on the goods side, with raw agricultural products jumping 12.8% from June, and fresh and dry vegetables seeing a substantial price surge. The landscape is far from certain, with countries like Vietnam facing a 30% transloading fee and India confronting a 50% tariff. 

The Federal Reserve is in yet another tricky spot when it comes to interest rates. The markets are clamoring for relief, but “hidden inflation” could be enough to warrant a pause. Goldman Sachs estimates that by October, consumers will pay approximately 67% of the additional tax.