THE BASIS POINT

Bonds & Rates Benefit from Higher PPI, For Now

 

The US Department of Labor’s May Producer Price Index reading Tuesday showed the prices that manufacturers and other businesses pay to create goods has risen 7.2% in the last 12 months. But since it’s commonly accepted that the US removes food and energy prices from the reading, the “core” PPI excluding these items for May 2007 to May 2008 increased 3%. It’s hard to ignore a 4.2% year over year increase in food and energy prices, yet we seem to. At least Forbes sounds cautious about Core PPI:

The department’s Producer Price Index, which measures inflation pressures before they reach the consumer, rose 1.4 pct in May following a 0.2 increase in April. That’s the fastest pace since last November.

Core inflation rose 0.2 pct for the month, after rising 0.4 pct in April. But that still left core inflation up 3.0 pct in the past twelve months, matching last month’s pace. The last time core inflation over a twelve-month period rose more quickly was December 1991.

MARKET IMPACT
In the past 2 trading days, investors have shifted from stocks to bonds on fears that stocks will take further hits as inflationary pressures eat away earnings. Treasury and mortgage bonds have rallied, bringing rates down 10-20 basis points; when bond prices increase in a rally, yields (or rates) drop. Don’t expect this bond rally to hold, since bonds hate inflation. It’s just that stocks hate it more right now.

 

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