This morning’s release of the Producer Price Index showed virtually no change from the previous month. However, what does that actually tell us? Nothing.
What we need to know, and what producers are already struggling with, is that while inflation did not theoretically increase over the last 30 days, what has it been doing for the past several months? The year-ago pace in August came in at 6.5 percent, compared to 7.2 percent in July (seasonally adjusted). The core rate in July held steady at 2.5 percent on a year-ago basis (seasonally adjusted). On a not seasonally adjusted basis for August, the year-ago headline PPI was up 6.5 percent while the core was up 2.5 percent.
These are minor changes, of course, and don’t really mean much in the grand scheme of things. What is important here is that PPI has now reached levels where it begins to impact the bottom line of producers. Rising prices have to either be absorbed or passed on. Consumers are already fairly constricted and can’t absorb much in terms or real price increases so we will most likely see it reflected in earnings in coming months.
The major drivers of producer price increases is from the commodity complex and the lower prices of energy this summer have certainly tamed PPI somewhat. We are about to enter the strong period of the year for energy prices and may well see energy prices creeping up in the coming months. However, it is important to note that food prices continue to surge and we will see that most likely reflected in the food and energy component of CPI when it is released tomorrow.
If CPI comes in low tomorrow this could well clear the way for the Fed to enact another round of monetary stimulus. The markets are already rallying in anticipation of the announcement. The question is whether or not it will be a “buy the rumor – sell the news” event.