PPI for August Down 0.9% As Oil Moderates, YOY Up 9.6%. Rates Down on This And Lehman/Credit Issues
The US Producer Price Index was down 0.9% in August and up 9.6% year over year through August. This is compared to being up up 1.2% in July and up 9.8% year-over-year through July. Like last month, this YOY spike is the largest since the early 1990s, and is due mostly to the oil price spike we had during the second quarter. Normally rate markets would spike on this inflationary news, but the negative monthly figure is all the more important this month because it proves that as oil dips below $100/barrel versus the $140+/barrel levels of early summer, it has an immediate downward impact on rates.
If you exclude oil and food prices from the report, Core PPI was up 0.2% in August and up 3.6% year over year through August versus being up 0.7% in July and up 3.5% year-over-year through July. Even the Core numbers are still above the Fed’s comfort zone of 1-2%, but with the latest wave of the credit crunch flaring up, rates are still dropping because problems with Lehman, the recent Fannie/Freddie takeover and looming problems in investment banking and insurance industries are weighing on economic growth and keeping inflation expectations at bay. This plus Tuesday’s CPI numbers will both be on the Fed’s radar when they meet next week for a rate policy meeting. We expect they’ll leave rates alone and focus on tactical cash measures.
As for the debate about Core versus Overall inflation: It seems difficult to look at the Core number if food and gas account for 33% of inflation. But this summer’s spike then drop in oil prices is the reason there are Core versus Overall readings. Food and Energy are considered to be volatile enough to leave off, or at least look at separately. As we see the oil price volatility’s effect on PPI, CPI and PCE, it becomes a relevant argument to look at the two figures separately. But the spread between core and overall should speak for itself—it’s a wide spread that cannot be ignored, especially when everyone has to eat and drive.