Why Producer Prices Could Show Inflationary Pressures

InflationOn Wednesday morning the markets will have to deal with yet another reading on inflation — albeit at the wholesale level. The US Labor Department will report its reading for the Producer Price Index (PPI) for the month of June. It would not be too surprising to see the numbers come in a little hotter than expected because of agriculture and energy price trends in June. Still, this may be temporary even if it is hot. Another thing to consider is that this may not mean that the Fed is getting ready to hit the panic alarm button if the reading is higher than expected.

Investors use the PPI as a precursor of consumer prices because rising costs of production can bring higher prices at the consumer level. It is a chain that is obvious, but there are frequently some exceptions.

Dow Jones is calling for the headline Producer Price Index to be up by 0.3% in June, up from a -0.2% reading in May. Bloomberg is calling for a 0.3% gain in the headline PPI. Dow Jones is calling for the PP reading on an ex-food and energy basis, the so-called core PPI, to be up by 0.2% in June from a -0.1% drop in May. Bloomberg is calling for a 0.2% gain in the core PPI reading.

We would again remind readers that the PPI calculation has been changed to measure the PPI for Final Demand. The headline index measures changes in prices for goods and services, and construction, sold to final demand - capital investment, exports, government purchases, and personal consumption.

The change in how the data is presented still has many investors and traders react to the release. All in all, the intent is to have a more focused reading on inflation at the producer (wholesale) level. Traders operate under the belief that inflation does not directly appear at the consumer level until you see two or three hotter producer price reports.

Be advised that traders and investors may look past the number if it is not too much above expectations. Oil has come back down to the $100 per barrel mark since the end  of June, and the runaway prices in food have not been in the headlines as much. Also, the preliminary data for June on imports and exports did not indicate any major inflationary pressures at all.

ALSO READ: Yellen Identifies Stock & Bond Bubble Segments

Also, keep in mind that Janet Yellen likely had access to preliminary data on the inflation front before her Senate testimony was given on Tuesday morning.

Filed under: Economy
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