Maybe it’s not so benign after all. Producer prices rose 1.0% in July, the Bureau of Labor Statistics reports. As with yesterday’s news on consumer prices, removing food and energy from the equation lessens the pricing momentum, bringing the PPI pace of advance down to 0.4% last month. But 0.4% ain’t hay.

In fact, 0.4% is the highest monthly rise in the so-called core producer price index since January’s 0.7%. As a result, core PPI now running at 2.8% over the past 12 months—the highest since 1995. Yes, Virginia, that’s 1995.
Inflation, if you haven’t yet caught the drift, isn’t quite dead. That fact promises threatens to be front and center when the Fed convenes its next Federal Open Market Committee meeting on September 20. Indeed, today’s PPI report all but insures that another 25-basis-point hike in Fed funds is coming. The news on wholesale prices “raises the probability that the Fed will not pause [in its raising of interest rates] this year,” Anthony Chan, senior economist at J.P. Morgan Asset Management tells Reuters today.
This all comes after last week’s FOMC statement that core inflation “has been relatively low in recent months….” Perhaps it’s time for the Fed to rethink.
At the same time, the PPI-driven inflation news is a double-edged sword for the bond market, and the economy overall. The 1.0% increase in the top-line PPI number for July was clearly driven by energy prices. Ditto for yesterday’s CPI report. If nothing else, investors are being reminded that higher energy prices are more than casually connected to inflation.
The dilemma is deciding whether higher energy prices will, in addition to sparking higher inflation, also derail the economy. But which peril takes priority? Inflation or recession? The fixed-income set was pondering just that today. The day’s conclusion: inflation was the bigger threat. Traders sold the 10-year in today’s session to the point that the yield retraced most of what it lost in the rally on Tuesday. As such, the benchmark Treasury sits at roughly 4.3% vs. 4.2% from the day before.
If there’s a case to be made for recession, the stock market wasn’t buying into the fear, at least not today. The S&P 500 inched higher by 0.2% on the day. The leading names in the index moving higher were Hewlett-Packard, General Electric and Microsoft—companies that rely in no small part on a growing economy.
Equity investors also took heart from the news that the big losers in the S&P 500 today were oil stocks, including ExxonMobil, ConocoPhillips, and Chevron. No surprise here, considering that oil prices dropped sharply today—down nearly $3 a barrel in New York futures trading, the biggest daily drop in recent memory.
One day a trend does not make, as they say. Oil’s still high and bond yields are still relatively low. As such, there are several questions that loom over the markets, including: Is today’s oil-price decline the start of a longer correction? Gaining some insight on that topic will help convince investors, one way or another, if an economic slowdown, if not recession, awaits.
Meanwhile, it’s business as usual on Wall Street, which is to say that short-term trading retains the allure of the moment over buy and hold. Indeed, the VIX index, a measure of the equity market’s price volatility, is on the rise this month. We’re all day trader’s now.