Producer prices jump in June on surging gasoline prices

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The bottom on June's producer price data? Inflation rose at the wholesale level, but investors can discount much of the increase due to a spike in energy prices.

Producer prices rose 1.8 percent in June, the U.S. Labor Department announced Tuesday, boosted higher by a surge in energy prices, which jumped 6.6 percent in the month, mostly due to the rising price of oil and gasoline. Energy prices also rose 2.2 percent in May.

Oil prices have since started to moderate, and with that downtrend likely to continue on sluggish petroleum demand, the energy-fed price rises should dissipate from the system, economists generally agree.

Economists surveyed by Bloomberg News had expected the PPI rate to increase 0.8 percent in June. Producer prices rose 0.1 percent in May and 0.2 percent in April.

Full-year PPI shows little price pressure

Further, the tame inflation at the producer price level is evidenced by the 12-month PPI rate: producer prices have actually fallen 4.6 percent in the past year.

Meanwhile, in June the core PPI rate, which excludes the often-volatile food and energy component, rose 0.5 percent, compared to the Bloomberg News consensus estimate of 0.1. The core rate fell 0.1 percent in May.

In addition, over the last 12 months, the core rate is up a scant 0.5 percent -- another sign of little price pressure in a U.S. economy operating well below GDP capacity.

Eric Swats, head of asset management for Rasmala Investments in Dubai, said one critical component of inflation containment is U.S. fiscal responsibility.

"The U.S. needs to raise a lot of debt over the coming months and at a time when there's talk about the dollar's status as a reserve currency, they [the U.S. government] need to convince people that hold the debt that the U.S. is committed to fiscal responsibility in the medium term," Swats told Bloomberg News Tuesday.

Business executives, economists, and in particular Fed officials closely monitor the producer price index because it provides an early-stage warning regarding inflation. Fed officials pay especially close attention to the core-PPI statistic, which excludes the often-volatile food and energy component, to gauge core business costs.

In June, food prices rose 1.1 percent; finished consumer goods climbed 1.1 percent; foods and feeds added 1.3 percent; intermediate supplies rose 1.9 percent; finished goods other than energy increased 0.5 percent; and construction component prices were unchanged.

Economic Analysis: A higher-than-expected rise in prices at the producer level in June, but again we'll discount this month, due to the spring surge in energy prices, which now appears to have reversed. Provided oil prices continue to trend lower, prices at the producer level will remain in check. Further, the key stat is the 4.6 percent year-over-year decline in producer prices: combined with the minor 0.5 increase in the 12-month core rate, which the Fed will focus on, the dual data points reflect near-deflationary conditions, if not an outright sign of deflation. Further, as most investors know, deflation robs companies of the ability to price goods fairly, hence it must be prevented, for a sustained U.S. economic recovery to start.

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