PPI Sept YOY Down .9% To +8.7% As Oil Drops. Retail Sales -1.2%. Recession Trumps Inflation.

The US Producer Price Index, which measures inflation at the business and manufacturing levels of the economy, was -0.4% in September and +8.7% year-over-year through September. Excluding volatile oil and food costs from the readings, “Core” PPI for September was +0.4% and +4.0% YOY through September. Below are the numbers for the third quarter.

Overall PPI Third Quarter:
Sept-Mo= -0.4%, Aug-Mo= -0.9%, July-Mo=+1.2%
Sept-Yr= +8.7%, Aug-Yr= +9.6%, July-Yr=+9.8%

Core PPI Third Quarter
Sept-Mo= +0.4%, Aug-Mo= +0.2%, July-Mo=+0.7%
Sept-Yr= 4.0%, Aug-Yr= +3.6%, July-Yr=+3.5%

The yearly overall numbers that include oil and food clearly show the effect of dropping oil prices since summer, especially from August to September the number dropped almost 1%. The core numbers are actually rising slightly, and normally that would be a cause of concern for the Fed. Their inflation comfort zone is 1-2% and with September YOY Core PPI at 4%, that’s too high—compared to the Fed Funds Rate of 1.5%, it means inflation-adjusted ‘real rates’ are -3.5%. This number is assuming people don’t eat or drive too. If subtract September YOY Overall PPI of 8.7% from Fed Funds of 1.5%, real rates are -7.2%.

But this doesn’t matter now because the main priority is to do whatever it takes to get out of the credit crisis. Also, the Fed’s bet is that inflation will continue to moderate as the credit crisis wears on and the economy weakens. Markets had little to no reaction to this news today, all trading is driven by sentiment about how bank deleveraging is affecting everything.

Also today, September Retail Sales were reported at -1.2%, the largest monthly drop in three years, and marking consecutive drops every month of Q3—Bloomberg reports that this is the longest streak in 16 years. Further proof that recession is the bigger threat than inflation right now.