Gauging inflation is always a tricky business, but rarely more so than in the spring of 2005. Today’s report on producer prices from the Labor Department is merely the latest clue suggesting as much.

To wit, wholesale prices rose 0.7% last month. That’s the fastest in four months and a pace that’s also tied for second with several recent reports for the second-fastest monthly rise since early 2003. Inflation, in short, appears intent on pushing higher.
But before you run out and sell bonds, take a look at the producer price index (PPI) less food and energy. By that adjusted measure of wholesale inflation, things look decidedly less bubbly on the matter of pricing pressures. Indeed, PPI less corn muffins and sweet light crude rose a sleepy 0.1% in March. Inflation, where is thy sting?
What we’re left with is two takes on wholesale pricing trends, with two materially different views. One says beware, the other suggests it’s nap time when it comes to worrying. The question for investors, Which measure tells the truth?
In search of an answer, or at least a lesser mystery, we start by deciphering the reason for the divergence in the two numbers. Fortunately, that’s no great task. The disparity can be explained in a word: energy. Prices for oil, gasoline and such jumped 3.3% in March alone.
All of which brings us back to square one, namely, which PPI index tells the real story? If you tell us where oil prices are headed, we can deliver a definitive answer. Short of that prescience, there is only guesswork.
But the prospect of guesswork never kept Wall Street sitting on the benches. In that spirit, the conjecture for today is assuming that oil prices will remain steady if not decline. If PPI ex-food and energy represents no threat, then the opportunity for hope is wide open, goes the reasoning. Ergo, there are new financial fish to fry, opines Brian Williamson, vice president at The Boston Co. “The focus is on earnings now this economic number [PPI] is out of the way. The market looks to be doing OK off the get-go here,” he tells CNN/Money today.
Indeed, the S&P 500 rose 0.6% today, providing some relief to the selling of late. A number of encouraging earnings reports helped turn the tide during the session, including a 25% rise for earnings at the computer chip maker Intel. After the market closed, there was more good news with Yahoo’s report that profit doubled from a year ago at the Internet-based media company.
But if the Street’s eager to dismiss the energy variable, oil traders aren’t quite ready to climb on board that wagon. The price of a barrel of crude jumped sharply today, rising by nearly $2 a barrel. Renewed worries that gasoline inventories may turn out to be less than anticipated sent the energy bulls back into overdrive. “Gasoline inventories are in decent shape, but it wouldn’t take long for the excess to disappear as we go into peak demand this summer,” Tom Bentz, an oil broker at BNP Paribas Commodity Futures, tells Bloomberg News.
And while we’re speaking of commodities, gold posted a tidy little rally today in the wake of the PPI report. Presumably, with the precious metal now trading at its highest in about a month (nearly $434 an ounce), the gold market believes that the broad-line PPI rise of 0.7% is the real McCoy.
But fret not as there’s more opportunity to separate the inflationary wheat from the chaff on Wednesday. Indeed, tomorrow brings the March report on consumer prices. And just to keep things lively, the government will offer fresh updates on oil inventories from the Energy Department. Affirmation or rejection of one’s investment bias awaits. Either way, count on the renewed bull market in volatility, courtesy of the VIX, a measure of volatility on the S&P 500.