Another Producer-Price Spike Threatens the Dow's Rally

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After yesterday's big surge, the stock market calmed down today as investors assess the true impact of Federal Reserve Chairman Ben Bernanke's comments Wednesday night. As of 12:25 p.m. EDT, the Dow Jones Industrials are down 34 points, coming down from yesterday's record-high close. With so much investor sentiment tied up in interest rate policy, economic data will take on increased importance in the weeks and months to come. With that in mind, let's look at this morning's latest report on producer prices to see what it can tell us about the stock market's future.

Another big PPI jump
For the second month in a row, producer prices spiked higher, with the 0.8% rise in June eclipsing the 0.5% increase we saw last month. That brought the change in finished-goods prices over the past year to 2.5%, the highest rate of growth in more than a year. Although producer prices don't get the same level of attention as consumer prices, they nevertheless represent a key indicator of inflationary pressure, especially because companies have done a good job in most industries of passing cost increases on to retail customers.

Once again, though, there's more to the PPI story than the headline number. Energy prices had an outsized influence on the PPI, with energy goods prices rising 2.9% during the month. Excluding food and energy, the core PPI rose 0.2%.

Moreover, further down the supply chain, inflationary pressure might also be increasing more broadly. Intermediate-goods prices rose 0.5%, the first gain in four months. At the crude-goods level, prices were unchanged, but over the past year they've risen at a rapid 11% annual rate. Yet at both levels, food and energy costs have played a big role in the gains, with core prices rising at a much more modest pace.

Price increases in certain areas have positive implications for investors in certain industries. For instance, a 0.8% rise in passenger car prices reflects the sales success that Ford and General Motors have enjoyed lately, even though it's somewhat surprising, given that the weakening yen would arguably give their Japanese competitors an opportunity to cut prices in U.S. dollar terms and threaten U.S. automakers' margins. So far, at least, that appears not to have happened, as Japanese automakers are apparently content to reap greater profits in yen terms. That has helped give Ford and GM the pricing power they need to make their own car sales more profitable.

But higher prices aren't always good for businesses. For instance, Valero Energy today warned that its earnings would be lower than expected, as discounts for U.S. crude have largely disappeared. For Valero and its fellow refiners, rising oil prices raise their costs, while there's no guarantee that retail gasoline prices, which are determined by world markets, will follow suit.

What's next?
The big question on the inflationary front is whether rising energy costs will show up as price increases in other goods. If they do, then the clock might be running out on the Fed to continue its aggressively accommodative monetary policy. If inflation remains in check, though, then it could set the stage for continued Fed stimulus well into the future.

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Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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