July Producer Prices

Wholesale price growth slowed in July compared to a month earlier according to the Bureau of Labor Statistics’ Producer Price Index (PPI).  Prices paid by firms for wares that will be sold to end users rose by 0.1 percent after jumping 0.4 percent in June.  This slowdown will likely be considered constructive by those concerned that inflation is gaining too much momentum.

All of the price growth can be attributed to the service sector of the economy.  The index for final demand services grew by 0.1 percent in the period while the prices for final demand goods were unchanged.  Since the majority of our nation’s output is comprised of services, this segment’s uptick overwhelmed the goods portion of the indicator, thus yielding a positive headline tally.  Perhaps confirming some of the concern expressed in Friday’s note, food costs moved higher by 0.4 percent and have increased by 3.6 percent in the last year, more than doubling the headline uptick of 1.7 percent in the same period.

One of the earlier stages in the production cycle showed a pattern similar to the final goods portion.  Intermediate demand for services ticked up 0.3 percent in the period and are 1.7 percent higher than a year ago.  Processed goods for intermediate demand ticked up 0.1 percent in July, including an increase of 0.4 percent for food and feeds.  However, there was a dramatic drop in the prices for unprocessed goods (the earliest stage), falling 2.7 percent.  Most of this decrease is attributed to the 6.4 percent collapse of energy materials, but even food fell 0.4 percent in the earliest stage of processing.

In all, PPI does not portend significant overall price hikes.  Central bankers will find this constructive because it suggests they are not “behind the curve” when it comes to inflation.  Some analysts worry that the Federal Reserve will not raise interest rates soon enough to control upward price pressures.  Food seems to be the only component of this indicator showing sharp increases, but this inflation may be beyond the control of the central bank since weather also influences it.  Until other segments increase faster, Janet Yellen may continue to rationalize keeping short-term rates at virtually zero.  (by C. Cox)