PPI Better But Bad

The June producer price report contains mostly bad news, even though the core reading was below expectations, rising 0.2% for the month instead of the expected 0.3%. One piece of bad news was the year-over-year gain for core prices, which were up 3% for a third month in June, topping the July 2005 high of 2.8% and holding at the highest level since December 1991.

At earlier stages of the production process, price increases remained large, although the rate of gain slowed for the month. Specifically, the price of crude materials, which represent prices at the earliest stage of production (raw materials and such), jumped 3.7% in June following a 6.7% gain in May, bringing the year-over-year gain to 45.5%, up from 41.5% in May.

Excluding food and energy, crude-materials prices fell 0.2%, following a gain of 5% in May and 7.9% in April, a gain exceeded only twice since record-keeping began in 1972 (+8.7% in May 2006 and +11.0% in July 2004).

Core intermediate prices, which reflect crude materials that have had some processing, increased an outsized 2.1%, following a 2.9% gain in May, which topped the 1.4% increase in October 2005, which was the most since January 1980. Excepting the January 1980 gain, May's 2% gain was the most since 1974.

The increase in these so-called "pipeline" figures will continue to pressure producer prices upward in the months ahead. The only solace in these horrendous figures is the fact that the financial markets have already largely digested the idea that producer prices are rising rapidly, a fact that can't be missed when watching commodities prices on a day-to-day basis. Only if commodity prices retreat will investors be forgiving of these data.

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Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market, first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.

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