Next Month's PPI Surprise Will be Colored Red

by: Scott Snively August 20, 2008    

Scott Snively

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The July PPI report surprised economists with the headline finished goods inflation at +1.2%, doubling expectations. The core PPI at +0.7% also topped the consensus estimate. Year over year the PPI was up 9.8% compared to 9.2% in June and 7.2% in May. Next month, economists are likely to err on the high side if they fail to account for the unique way monthly PPI data is gathered.

PPI data does not reflect end-of-month price gains, or an average monthly price gain. The Dept of Labor explains in the July report that, "Prices submitted by survey respondents are effective on the Tuesday of the week containing the 13th day of the month." [Emphasis added.]

The effective survey date for July was the 15th, near the high water mark for gasoline and heating oil. The 3.1% jump in the finished energy goods certainly contributed to the upside surprise. Year over year, the energy goods component of PPI soared 28.0%. Food rose 8.7% and all other finished goods rose a paltry 3.5%. When it comes to PPI, energy is the big dog.

Looking ahead to next month, the August PPI report will capture a sharp energy price decline. For reference, Sept heating oil fell 22.3% and RBOB gasoline fell 16.7% during the PPI measurement period which ended on Aug 12.

Other commodity prices should also contribute to the downside PPI surprise. The gains in finished food prices were tempered in July at 0.3% compared to June at 1.5%.

Moving upstream in the PPI, energy, agriculture and metals futures have also fallen during the reference period. Sept oil futures tumbled 18.9% and natural gas fell 28.0%. Sept corn dropped by 21.5%, soybeans swooned 21% and wheat edged down 2.6%. Finally August copper was also tarnished with a 13% decline, but Sept lumber traded higher by 5.7% through Aug 12.

The futures data only offer a sense of direction for the August PPI survey to be released on Sept 12. Economists who fail to account for the early Aug 12 data reference date are likely to overestimate wholesale inflation next month. After the upside miss for July PPI, the word whipsaw comes to mind.

The inflation trade in commodity sectors was reinvigorated on Tuesday. However, the bounce could well be a technical one as world economies decelerate dampening commodity demand. Treasury yields do not forecast inflation; ditto for the currently tepid money supply (M2) growth. The pace of deleveraging in financial markets also argues against renewed inflation.

Stock position: None.

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This article has 1 comment:

  •  
    Aug 20 04:27 PM
    will we must wait and see, but you are wrong to suggest anything on CPI is a logical as you suggest. The slicing and dicing is always too much for even the rational women to understand. I am not that, of course, but I do think that Hank wants inflation down so gold will be wiped out before the equities are wiped out. This is not what he hired for, but it what he does, so off we go. Z
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