The Producer Price Index (PPI) is a measure of the average price level for a fixed basket of capital and consumer goods received by producers. Why Investors Care
| Released on 8/19/08 For Jul 2008 | |||||||||||||||||||||||||
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Highlights
Producer price inflation in July remained red hot and even sharply accelerated at the core level. The overall PPI inflation rate barely slowed from June's torrid pace, posting a 1.2 percent increase, following a 1.8 percent surge in June. The price hike in July was far above the consensus forecast for a 0.5 percent gain in the overall PPI. The core PPI rate jumped 0.7 percent, surging beyond June's 0.2 percent increase and topping market expectations for a 0.2 percent boost. The headline number was led by energy but the core was boosted by a number of components. While some of the headline gain can be discounted due to recently lower oil prices, the leap upward in the core rate is disconcerting. But on the news, Treasury rates were little changed due to traders in flight to safety mode due to continuing worries over the health of Fannie Mae and Freddie Mac.
Energy led headline inflation in July with a 3.1 percent boost after a 6.0 percent spike in June. Food price inflation moderated to 0.3 percent after a 1.5 percent spike in June.
But the biggest surprise in the report is the 0.7 percent hike in core prices. Passenger cars and light trucks led the way with increases of 1.4 percent and 0.8 percent, respectively. But gains were widespread with notable strength seen in items such as pet food, pharmaceutical preparations, soaps, tires, newspapers, floor coverings, household appliances, sporting goods, jewelry, and the vast majority of capital equipment components. The point is that higher costs are boosting inflation at the producer level and may be nudging core consumer inflation in coming months.
For the overall PPI, the year-on-year rate surged to up 9.8 percent from 9.1 percent in June (seasonally adjusted). The core rate rose to up 3.6 percent in July from up 3.1 percent the prior month.
Today's report shows a rise in underlying inflation. Markets do not seem to be concerned due to the expected impact of lower oil prices. But the Fed certainly will be mulling the numbers over.
The producer price index accelerated dramatically in June at the headline level but remained moderate at the core level. The overall PPI inflation rate remained red hot in June with a 1.8 percent jump, following a 1.4 percent spike the month before. The core PPI rate, however, held steady at a 0.2 percent rise and fell short of market expectations for a 0.3 percent gain. The headline number was led by a monthly 6.0 percent surge in energy costs and a 1.5 percent gain in food prices. Within energy, gasoline spiked 9.0 percent for the month and is up 39.7 percent for the year. More recently, deceleration in the overall import price index (1.7 percent from 2.9 percent in June) suggests that the headline PPI will ease in July but still remain relatively strong. Also, the July CPI came out earlier than the PPI and this index was much stronger than expected with a headline 0.8 percent boost.
PPI Consensus Forecast for July 08, m/m: +0.5 percent
Range: +0.1 to +1.6 percent
PPI Consensus Forecast for July 08, y/y: +9.1 percent
Range: +8.8 to +9.6 percent
PPI ex food & energy Consensus Forecast for July 08, m/m: +0.2 percent
Range: +0.1 to +0.3 percent
PPI ex food & energy Consensus Forecast for July 08, y/y: +3.2 percent
Range: +3.1 to +3.3 percent
![[Chart]](chart.gif)
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It is always a good idea to look at more than a few months of data to get a sense of changes in established trends. Monthly changes in the PPI are mainly volatile because of sharp fluctuations in food and energy prices. The core PPI eliminates the sharper fluctuations. |
![[Chart]](chart_1.gif)
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Yearly changes tend to smooth out more severe monthly fluctuations and give a better idea of the underlying rate of inflation. Even with the smoother trend, note that the core PPI does not fluctuate as much as the total PPI. |
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