This piece was originally published on July 12th, 2024
Overview:
Today we got the June Producer Price Index (PPI). The PPI is similar to the Consumer Price Index (CPI) except it measures pricing changes experienced by manufacturers and suppliers of goods and services. Because price changes in the PPI make their way into the CPI over time, the PPI is considered a leading indicator of the direction of future consumer prices.
Both revised up and trending up.
The June PPI was up 0.2% for the month which was above the 0.1% expected and well above last month’s -0.2%. The yearly PPI was up 2.6% which was above the 2.3% expected. This is an area where short-term projections tend to be accurate so underestimating the PPI by 0.3% is a big miss by the economists and an indication that prices are up considerably more than hoped.
The Core/Core PPI (which excludes food, energy, and trade services) was unchanged vs last month which was roughly in line with expectations. The annual increase of 3.1% was well above expectations of 2.5% and last month’s 2.3%. The Core PPI excluding only food and energy was up 3.0%.
While the Bureau of Labor Statistics excludes food, energy and trade services (mostly transportation) in its release, many economists focus on the Core number excluding only food and energy. This is a closer match to how the CPI is reported. This is the area where the numbers show a problem. The Core monthly increase was 0.4% which was well above the 0.2% expected. Even worse, the May increase was revised from 0.0% to 0.3%.
Cutting through all of this: The market expected a May Core PPI of 0.0% and a June Core PPI of 0.2%. Instead, May was revised to 0.3% and June was 0.4%. That’s about a 0.7% increase over expectations. To give you a sense of the magnitude of that, 0.7% annualized is 8.7%.
Despite yesterday’s encouraging CPI print, inflation is not over yet. Unsurprisingly, the goods segment of the PPI was down while the services part of the index was up big. Services were up 0.6% monthly after increasing another 0.3% in May. One surprise was that much of the June increase in final demand services relates to an increase in margins for machinery and vehicle wholesaling. Some of that may be related to transportation costs and some may be related to repairs.
Conclusion:
Yesterday, the market took up expectations for a September rate cut to over 80% due to the declining CPI print. DKI disagreed. Today’s very hot PPI print means it will be hard for the Fed to cut anytime soon. Again, a higher PPI signals a higher CPI in a couple of months or so. We continue to believe that a Fed rate cut before the November election is unlikely and that it would take a significant downturn in the economy over the next couple of months for us to change our opinion on that.
Acknowledgements:
Hat tip to Contrarian Investor Media and to Mark Rossano for contributing to this report.
IR@DeepKnowledgeInvesting.com if you have any questions.
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