Will June PPI Even Be Relevant?
Tuesday’s report on the Producer Price Index used as the gauge against wholesale inflation may mark one of the more important trader events outside of earnings. But there is a serious question on whether or not the number is even relevant if you consider the prices of June compared to today. Since the end of June, we have seen a $10 drop in the price of oil. We have seen only about a 2% to 3% drop in the price of gold during the same period. So far, we have yet to see any of that nasty inflation and hyperinflation from all that new money being printed that many have feared.
Bloomberg has consensus economist estimates for Tuesday’s PPI at +0.8% on the nominal headline figure. The core rate taking out food and energy is expected to show a reading of only +0.1%.
Because oil was much higher and because the bias through much of June was still bullish in oil, tomorrow’s figure could be a false alarm for the inflation hawks. If that number comes in much lighter then expected, then it is going to give the inflation hawks even less of a basis for all the fears that prices were heading through the roof any time soon. The big rise in oil was in May when prices at the end of April went from the mid-$50’s up into the $70’s by June. As there is a lag on that, we won’t be shocked if a higher number on the headline PPI is the result. But the trend in oil rigs is already contracting again, and that does not lend much credibility to the notion of suddenly higher oil prices nor that of a sudden return of demand.
Another notion to consider is that, even with a one-week figure of sub-600K job losses, the shrinking confidence of CEOs, shrinking consumer expectations, and a growing unemployment will continue to offset all that hypothetical new printed money for some time.
The recent bond auctions and more recent drop in longer-term bond yields is also acting to push out the expected arrival of inflation or hyper-inflation. The 10-Year Treasury yield was up as high as 4.00% in early June. That was back at 3.52% at the end of June and is now just under 3.30%.
On the pricing of potash and fertilizer companies, metals companies, and manufacturing lines, the notion seems to be at best that prices have stabilized at lower levels. But production forecasts so far are being set with low expectations for all of 2009 into early 2010. And Warren Buffett just last week was out canning all of the green shoots and called for a second stimulus package. The notion that he panned the freight rates for railroads is just one more notion that producer prices are not likely to see major spikes back up because the output of and demand for products from producers remain low.
You can never call an economic number concerning inflation an irrelevant factoid. But even if we see a much higher than expected PPI report on Tuesday it would be easy to put an asterisk next to it. A headline number of +1.0% on the PPI is not impossible. That would create a spike of concern on the surface, but the price trends of commodities and the markets since the end of June could easily create a number that traders and investors treat as an anomaly.
Jon C. Ogg
July 13, 2009