Merk Investments: PPI June 2008
The producer price index for June advanced above expectations with the headline increasing 1.8% m/m and 9.2% y/y on the back of a 9.0% m/m increase in the cost of gasoline and 1.5% m/m increase in the cost of food. The core advanced 0.2% m/m and 3.0% y/y. Ex-food prices increased 1.9% m/m and 9.4% y/y. Ex-energy costs rose 0.6% m/m and 4.4% y/y. The cost of consumer goods increased 2.3% m/m and 11.2% on an annual basis.
Total intermediates increased 2.1% m/m and 14.5% y/y. Core intermediates rose 1.3% m/m and 8.4% y/y. On a three month annualized basis headline pressures in the pipeline increased 26.8% and the core rose 19.3%.
Advancing costs for fuel and basic inputs are in the process of clearly reducing already thin profit margins and creating the conditions whereby firms will have to consider ignoring competiveness pressures and begin to pass through prices to customers downstream. The 9.2% increase for June was the largest year over year increase since June of 1981 and is indicative of the risk to a breakout in core inflation down the line should the Fed choose to support a fragile economy and financial system.
Joseph Brusuelas
Merk Investments
Chief Economist/VP Global Strategy
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