Producer Prices Spike

Last month's producer price report showed initial signs of pressure and is followed this month by greater evidence of emerging and very welcome price strength. The producer price index for June is up 0.5 percent with the ex-food & energy reading up 0.4 percent, both 2 tenths higher than expected and 1 tenth higher than May. The rate excluding food, energy & trade services is up 0.3 percent which is 4 tenths higher than a month ago.

The rise underway in energy prices is of course a major feature right now of inflation, up 4.1 percent in this report following a 2.8 percent rise in May. But it's a gain for services which is a highlight of today's data, up 0.4 percent in the month which if extended in future months would be the foundation for wider reflation that Federal Reserve policy makers are hoping for. Another foundation may be finished goods where prices, lifted by trucks and cigarettes, jumped 0.8 percent following May's 0.5 percent rise. Finished services, boosted by gains for security brokers, also show strength, at plus 0.5 percent, as do food prices which are up 0.9 percent.

Year-on-year rates are subdued but moving in the right direction, rising slightly to plus 0.3 percent overall and 1.3 percent ex-food & energy. The deflationary effects of last year's strength in the dollar and collapse in oil prices may now finally be clearing, providing a new floor from which prices will hopefully begin to rise.

Recent History Of This Indicator:
Producer prices showed strength in May, rising 0.4 percent for the best gain since May last year that was fed not only by petroleum but also by service prices. The 0.3 percent rise for the core rate (less food & energy) was also strong and further reason for optimism that price pressures may now be building at the base of the economy. Forecasters see another positive month for producer prices in June, at a consensus plus 0.3 percent for the overall rate and plus 0.2 percent for the core.