The Producer Price Index (PPI) jumped 1.7% on a surge in energy prices (6.4%) and a moderate (0.9%) increase in food prices related to this summer’s drought. The core (non-food and energy) increase in PPI was a much more benign 0.2% in August.
Intermediate gains in the PPI rebounded 1.1% after four months of decline. Again, most of this increase came from a rise in energy prices.The category of food and feeds also rose 2.4% in response to the drought. Core intermediate goods fell 0.2% after stripping out the volatile energy and food components.
The question for overall inflation is whether much of the increase in the pipeline on producer prices can make it into consumer prices. So far, it has been difficult for producers to pass on much more than the raw increases in food and energy. This is especially hard on consumers in low-income households who spend a disproportionate amount of their monthly budgets on getting to work and putting food on the table. It is also, however, a blow to demand in an already fragile economic environment.
Bottom Line: Today’s PPI highlights the dual nature of inflation in the economy. Core inflation remains benign and demand too weak to allow too much of commodity-based inflation to make it into end products. The rise in energy prices is particularly hard on demand, however, and likely to get worse given the increasing tensions in the Middle East.