Tariffs are taxes: February’s PPI shows where they land

February’s Producer Price Index (PPI) report came in hot. Final demand increased by 0.7 percent from January, for an annualized rate of nearly 9 percent. This is especially concerning, since PPI is a leading indicator of future inflation. It is tempting to blame this greater increase on persistently high tariff rates. But as I argued after the January Consumer Price Index release, tariffs are not technically inflationary.

The February PPI report helps explain why. The clearest place to look for a broad tariff effect is final demand goods, excluding food and energy. Food and energy prices are often driven by weather, disease, seasonality, and commodity volatility, while many service categories reflect wages, rents, finance, or retail margins. If tariffs were the main reason February’s PPI came in high, one would also expect to see a large increase in that broader ex-food and ex-energy goods category. Instead, it rose by a modest 0.3 percent.  

By contrast, food prices rose 2.4 percent and energy prices rose 2.3 percent, accounting for more than 40 percent of the increase in final demand goods. February’s food data illustrates this point. Egg prices rose 93.6 percent after falling 63.9 percent in January. Fresh and dry vegetable prices rose 48.9 percent after falling 5.7 percent the month before.

Although not captured in February’s PPI, recent oil-price volatility surrounding the war in Iran is another example of the kind of sharp, event-driven price movements that should not be confused with broad tariff-driven inflation. These are violent category-specific swings, not the kind of sustained price increases one would expect from tariffs driving the whole report.

This does not mean tariffs were irrelevant; it means their effects were narrower. The strongest overlap appears in the electronic components and accessories category, which saw prices rise 10.3 percent in February and 17.9 percent year over year. Several metal-related categories also increased sharply: steel mill product prices rose 3.0 percent in February and 20.9 percent year over year. Aluminum mill shapes rose 5.7 percent in February and 39.1 percent year over year. Iron and steel scrap prices rose 5.0 percent in February, while nonferrous metals rose by 1.1 percent. Those are precisely the sectors where tariff pressures would be expected to materialize.

By February, tariffs on steel, aluminum, and many Chinese goods were already in force, and the new Section 232 semiconductor tariff had taken effect in mid-January. That does not prove a one-for-one passthrough from tariff rates to producer prices. The PPI measures prices received by domestic producers, not the tariff itself. But it does suggest that tariff-exposed sectors were among the clearest sources of price pressure in February.

This strengthens the case against tariffs. The problem is not that tariffs mechanically turn every inflation report into a disaster. Rather, the problem is that they function as selective taxes. They raise costs in politically targeted sectors, distort price signals, and make production more expensive where the government chooses to intervene. Tariffs were not the whole story in February’s PPI report, but they were still making parts of the story worse.