Why a 'Good' PPI Isn't Such Good News

by: Ron Haruni

The U.S. Labor Department reported on Tuesday that the PPI Index for finished goods, an inflationary indicator which evaluates wholesale price levels in the economy, advanced 1.2% in July versus a consensus expected of 0.6%. This increase followed a 1.8% jump in June and a 1.4% rise in May.

Among prices for finished goods, the index for energy goods rose 3.1 percent in July following a 6.0% jump in June. The Producer Price Index for Intermediate goods advanced 2.7 percent in July and are up at a 36.0% annual rate in the past three months.

Crude Materials increased 4.2% in July, following a 3.7-percent advance in June.

The core PPI which excludes volatile energy and food components grew 0.7% month-over-month (consensus 0.2%), and is up 3.5% versus last year, posting the fastest unadjusted annual pace since 1991. Overall inflation is up 9.8% in the past year, showing the largest increase since 1981.

July PPIClick to enlarge

It does appear the inflation situation continues to deteriorate, and the leap upward in the core rate is, to say the least,disconcerting. In addition, the fact that the overall inflation rate remains on an upward trajectory and no longer confined to food and energy prices is, in our view, an acute economic problem that members of the Fed must address.

Separately, the Commerce Department also reported Tuesday that July housing starts came in at 965K on an annualized basis, ahead of the estimated 960K, while building permits were only 937K, below the 970K consensus.