Looking Past the Energy Price Rollercoaster, Core Price Gains are Steady
- The June Producer Price Index increased by 0.1 percent, after falling by 1.0 percent in May.
- The Core PPI for Finished Goods increased by 0.2 percent for the fourth consecutive month.
- The University of Michigan’s Consumer Sentiment Index for July fell to 72.0 as expectations deteriorated.
- Initial Claims for Unemployment Insurance fell by 26,000 for the week ending July 7, to hit 350,000.
Weaker energy prices have kept a check on overall producer and consumer price indexes since March, but that check is starting to diminish as oil prices stabilize near $85 per barrel. The producer price index for finished goods increased by just 0.1 percent in June, the first increase since February. March, April and May producer prices were held down by the tumble in crude oil prices. The energy price component of the PPI fell again in June, but not because of oil. The wholesale price for residential electricity fell, most likely due to very low natural gas prices earlier this spring. Wholesale food prices gained 0.5 percent in June, the biggest monthly increase since last November. Very poor growing conditions in the Midwest will significantly reduce yields for corn and soybeans and this is already pushing up food prices. Consumer foods have nearly the same weight in the finished goods PPI as energy, so there is potential for a push to overall prices levels from higher food prices in the months ahead. While some are touting the disinflation pull of energy prices since March as an incentive for the Federal Reserve to launch another round of quantitative easing, core prices (everything except food and energy) are not softening. The core PPI for finished goods gained 0.2 percent in June, as it has in every month since March. Prices gains for light trucks, major household appliances and pet food pushed the core index up. Data for the consumer prices index for June will be released this Tuesday, July 17.
Consumer sentiment, as measured by the University of Michigan index, fell in July to 72.0, after falling in May. The break in the index since May marks the end of an improving streak that began last September. Consumers are relatively sanguine about current conditions, but the expectations component of the index has taken a dive. Initial claims for unemployment insurance fell by an eye-catching 26,000 for the week ending July 7. This was the biggest weekly drop since January. Two special factors distorted the numbers. First is the July 4th holiday and the second is the shorter-than-normal summer shutdowns at many auto assembly plants. It is a relief to see the increasing trend in initial claims through the second quarter finally broken, but the numbers, already muddy, will get muddier toward the end of summer, so interpretation will be tricky (situation normal).
Market Reaction: Equity markets opened with gains. Treasury yields are up at both ends of the yield curve. NYMEX crude oil is up to $87.09/barrel. The dollar is down against the yen and the euro.