THE BASIS POINT

PPI for July Up 1.2%, YOY Up 9.8%, Most Since 1991 Due to Oil

The US Producer Price Index was up 1.2% in July and up 9.8% year-over-year through July. This was the largest YOY spike since 19891, 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 rates have been stable today because oil has since come off it’s $140+/barrel highs and is now trading around $115/barrel. For now, markets are betting business and manufacturing level inflation will moderate.

If this sounds familiar, it’s because last week’s summary of July CPI said the exact same thing about consumer inflation: an oil-induced spike. If you exclude oil and food prices from the report, Core PPI was 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 more housing and credit market induced weakness on the horizon, inflation could moderate—the Fed has said this repeatedly in their FOMC policy statements. But there’s certainly reason for voting members of the FOMC like Dallas Fed president Richard Fisher to sound inflation alarms like he did today because with the Fed Funds rate at 2%, inflation-adjusted or “real” producer inflation is interest rates are -1.5%.

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.