Tuesday, August 14, 2007

The PPI is Up 0.6% for July

The PPI for July is up 0.6% for July, largely driven by increases in energy prices. One problem noted in the article is that companies are unable to pass along cost increases. This continuing issue indicates a weak economy that either cannot or will not absorb higher prices. This will eventually cut into corporate profitability. From Market Watch:

Led by a 2.5% increase in energy prices, wholesale prices increased a larger-than-expected 0.6% in July, the Labor Department reported Tuesday.

Wholesale food prices fell 0.1%, the third straight decline after hefty increases at the beginning of the year.

Excluding food and energy prices, the core producer price index increased 0.1%, as expected.

Producer prices are up 4% in the past year, while core prices are up 2.3%, the biggest gain in nearly two years.

The PPI report shows a mixed picture on wholesale inflation, with firms largely unable to pass along the higher costs they pay for crude materials and partially processed goods. Crude goods prices rose 1.2% in July, while prices for intermediate goods needing further processing rose 0.6%.

One key indicator of inflationary pressures fell to a three-year low. The core intermediate goods PPI rose 0.2% in July and gained just 2.4% in the past year, the smallest gain since January 2004.

The PPI is not the Fed's focus; the real issue is what consumer prices do. The PPI measures prices in the production pipeline, not at the retail level

The report comes one day before the more-important consumer price index, which is expected to show a modest 0.1% increase for overall inflation and a 0.2% increase for the core rate excluding food and energy prices.

The Fed monitors a different but related inflation measure produced by the Commerce Department, known as the personal consumption expenditure price index, which will be released at the end of the month.

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