Here’s Why the Producer Price Index Rekindled Inflation Worries

Today’s release of the Producer Price Index for July again reinforces the pattern of higher inflation. The year-over-year finished goods number was up 0.2% month-over-month and 7.2% year-over-year. Briefing.com had posted a consensus forecast of 0.0. Core PPI (ex food and energy) came in at a hotter 0.4%, double the Briefing.com consensus forecast. Here is a snippet from the news release:

The Producer Price Index for finished goods rose 0.2 percent in July, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This advance followed a 0.4-percent decrease in June and a 0.2-percent rise in May. At the earlier stages of processing, prices received by manufacturers of intermediate goods moved up 0.2 percent in July, and the crude goods index declined 1.2 percent. On an unadjusted basis, prices for finished goods moved up 7.2 percent for the 12 months ended July 2011….

Finished core: The index for finished goods less foods and energy moved up 0.4 percent in July, the eighth consecutive rise. Nearly one-quarter of the July advance can be attributed to a 2.8-percent increase in prices for tobacco products. The indexes for light motor trucks and pharmaceutical preparations also contributed significantly to the rise in the finished core index.   More…

Now let’s visualize the numbers with an overlay of the Headline and Core (ex food and energy) PPI for finished goods since 2000, seasonally adjusted. As we can see, Core PPI declined significantly during 2009 but has been rising since the late spring of last year.

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As the next chart shows, Core PPI is more volatile than Core CPI. For example, during the last recession producers were unable to pass cost increases to the consumer. Likewise in 2010 the Core PPI generally rose while Core CPI generally fell. But in recent months these two core metrics have been moving in tandem.

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Tomorrow’s CPI will be very closely watched. Will we see additional evidence that the evidence of worldwide inflation is coming home to roost in the U.S. household budget?

Doug Short Ph.d is the author of dshort.com.

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