Wholesale inflation consistently accelerated during the second half of 2025, signaling that delayed impacts on consumer prices linked to President Donald Trump’s signature tariff policies may emerge in the coming months.
Should that occur, Kevin Warsh — the president’s just-announced nominee to replace Jerome Powell as chairman of the Federal Reserve when his term expires in May — may face an early test of his capacity to deliver the rate cuts that Trump has frequently said are nonnegotiable.
The Bureau of Labor Statistics (BLS) reported Friday that prices for goods and services in the supply chain — what General Mills pays for whole grain oats, quality control, cardboard packaging and transportation, not the price of the box of Cheerios a consumer puts in their shopping cart — rose faster than economists expected in December.
The producer price index (PPI), which tracks wholesale inflation, jumped 0.5% from November and 3% annually in December, compared to economists’ estimates of 0.2% and 2.8%, according to polling by Bloomberg.
Core PPI, which excludes the volatile food and energy price categories, rose 0.4% monthly while matching November’s 3.5% pace of annual growth, above estimates 0.2% and 2.9%.
The annual pace of growth in core PPI averaged 3.53% in the first quarter of 2025, then plunged to 2.67% in the second quarter in the immediate aftermath of Trump’s “Liberation Day” tariff announcement on April 2.
The subsequent rollout of the White House’s tariff agenda has occurred in fits and starts since then, with a revolving threat of tariffs against key U.S. trading partners sending waves of volatility through the U.S. and global economies.
The effective tariff rate across U.S. trading partners was 16.9% as of Jan. 19, according to the Budget Lab at Yale. By comparison, the effective tariff rate averaged 2.42% in 2024, though the current rate is well below the 22.5% estimate released by the Budget Lab on April 2 following Trump’s announcement.
Steadily rising supply-chain inflation
Consumer-price impacts driven by higher import taxes were slower to emerge in 2025 than economists initially expected, though businesses broadly reported intentions to pass tariff-related costs through to consumers.
But core supply-chain inflation rose to an average annual pace of 2.97% in the third quarter and 3.47% in the fourth quarter, underscoring growing strain on producers and suggesting that a tipping point may be approaching.
On Wednesday, the Fed elected to keep the federal funds rate unchanged following three consecutive rate cuts. Powell noted after the announcement that the personal consumption expenditures (PCE) price index, the Fed’s preferred inflation gauge, rose at an annual pace of 3% in December from 2.8% growth in November, though official statistics have not yet been reported by the BLS.
Since mid-2022, the Fed has been trying to return annual inflation to its stated 2% target by keeping the U.S. economy’s benchmark borrowing rate elevated, a policy tool that broadly reduces demand.
Powell directly linked “one-time price impacts” from tariffs to the consistent overrun in goods prices sealing inflation indexes in the high-2% range through the second half of 2025, adding that he expects those price impacts to dissipate in “the middle quarters” of 2026. But most of the rise in wholesale inflation in December was fueled by a spike in prices for final demand services, reversing recent trends with prices for final demand goods unchanged.
Services inflation rose 0.7% on a monthly basis in December. That equals the 0.7% spike observed in July, which was followed by more modest 0.3% readings in September and October and a 0.1% reading in November.
The December increase was broad-based, according to BLS, impacting machinery and equipment wholesaling, guestroom rentals, food and alcohol retailing, portfolio management, airline passenger services and beauty goods retailing.
Monthly volatility belies a consistent six-month rise in supply-chain services inflation. After bottoming out at 1.6% annual growth in June, services inflation rose 1.9% on an annual basis in July and August, 2% in September, 2.2% in October and 2.5% in November before topping out at 2.7% last month, its fastest pace of growth in 2025.
As services inflation chugged higher during the second half of last year, the annual pace of wholesale goods inflation, which averaged 0.67% in the first quarter of 2025, rose to 1.37% in the second quarter, 2.8% in the third quarter and 3.37% in the fourth quarter. Goods inflation fell to 3.4% annual growth in December compared to 3.6% in November.
Tariffs undermine inflation battle
While supply-chain inflation is rising for producers across both the services and goods categories, a new study shows that — contrary to Trump’s claims that foreign countries and exporters are paying the tariff premium for access to U.S. markets — U.S. importers and consumers have eaten nearly all of the costs.
The Kiel Institute, a nonprofit economic research institute founded in 1914 and based in Germany, analyzed shipment-level data across 25 million transactions from last year with a value of almost $4 trillion. It found that 96% of the tariff burden was paid by U.S. buyers.
“We find near-complete pass-through of tariffs to U.S. import prices,” the researchers wrote in their analysis published in mid-January. “U.S. customs revenue surged by approximately $200 billion in 2025 — a tax paid almost entirely by Americans.”
Trump, who has frequently said that the $200 billion increase in customs revenues may fund direct $2,000 payments to U.S. households, would thus be issuing a tax rebate, not a dividend.
Effectively, the global economy has passed the cost of tariffs through to the U.S. economy, exerting a self-inflationary effect driving up costs for businesses and households alike.
Warsh has previously remarked that “inflation is a choice.” Assuming he receives Senate confirmation, he will take the reins as Fed chairman with difficult choices to make.
With consumers’ economic outlooks recently plunging below pandemic-era lows, and delayed tariff impacts threatening to further undermine consumer confidence, Warsh will be handed the responsibility of keeping inflation in check amid Trump’s demands for lower interest rates.
