This morning’s update on producer prices for July was surprisingly low, which bodes well for tomorrow’s release of consumer prices. The producer price index (PPI) rose just 0.1% for last month, the least threatening report for wholesale prices since February’s anomalous 1.2% decline. The consensus forecast anticipated a 0.3% rise, according to TheStreet.com. Core PPI (less food and energy) was even more benevolent, posting a 0.3% fall in July, vs. a consensus prediction of 0.2%.
If tomorrow’s dispatch on consumer prices for July echoes today’s PPI news, Fed Chairman Ben Bernanke’s big gamble, as we recently labeled his monetary policy inclinations, will enjoy a resurgence of respect. One month a trend does not make, but the hawks may be forced to snack on a little crow come the end of the week.
Indeed, the 12-month core PPI certainly appears on its way to being tamed. Having advanced by 1.3% for the year through July, the pace has now fallen dramatically from the pace of recent history, as the chart below illustrates.
12-month rolling % change in core PPI, through July 2006

For investors looking for another excuse to turn optimistic, there’s also the news that oil prices are again on the retreat, which if it continues has the power to take more than a little of the inflationary pressures out of the system. The immediate trigger for the selloff is the tentative ceasefire announced in the Israel-Lebanon conflict. Such things are tenuous in that corner of the world, but for the moment there’s reason to at least be somewhat less pessimistic for the remainder of the summer.
As we noted a few weeks back, the fundamentals of crude suggest that prices should be lower, at least for the foreseeable future. The complicating factor has been fear, which has kept oil prices higher than economics alone imply. If fear takes a respite, if only briefly, and the latest warm and fuzzy aura on prices holds steady with tomorrow’s CPI report, the bulls may regain control of the stock and bond markets this week and perhaps this month.
Hope in August…it’s the new new thing.