Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Another Producer-Price Spike Threatens the Dow's Rally

After yesterday's big surge, the stock market calmed down today as investors assess the true impact of Federal Reserve Chairman Ben Bernanke's comments Wednesday night. As of 12:25 p.m. EDT, the Dow Jones Industrials (DJINDICES: ^DJI  ) are down 34 points, coming down from yesterday's record-high close. With so much investor sentiment tied up in interest rate policy, economic data will take on increased importance in the weeks and months to come. With that in mind, let's look at this morning's latest report on producer prices to see what it can tell us about the stock market's future.

Another big PPI jump
For the second month in a row, producer prices spiked higher, with the 0.8% rise in June eclipsing the 0.5% increase we saw last month. That brought the change in finished-goods prices over the past year to 2.5%, the highest rate of growth in more than a year. Although producer prices don't get the same level of attention as consumer prices, they nevertheless represent a key indicator of inflationary pressure, especially because companies have done a good job in most industries of passing cost increases on to retail customers.

Once again, though, there's more to the PPI story than the headline number. Energy prices had an outsized influence on the PPI, with energy goods prices rising 2.9% during the month. Excluding food and energy, the core PPI rose 0.2%.

Moreover, further down the supply chain, inflationary pressure might also be increasing more broadly. Intermediate-goods prices rose 0.5%, the first gain in four months. At the crude-goods level, prices were unchanged, but over the past year they've risen at a rapid 11% annual rate. Yet at both levels, food and energy costs have played a big role in the gains, with core prices rising at a much more modest pace.

Price increases in certain areas have positive implications for investors in certain industries. For instance, a 0.8% rise in passenger car prices reflects the sales success that Ford (NYSE: F  ) and General Motors (NYSE: GM  ) have enjoyed lately, even though it's somewhat surprising, given that the weakening yen would arguably give their Japanese competitors an opportunity to cut prices in U.S. dollar terms and threaten U.S. automakers' margins. So far, at least, that appears not to have happened, as Japanese automakers are apparently content to reap greater profits in yen terms. That has helped give Ford and GM the pricing power they need to make their own car sales more profitable.

But higher prices aren't always good for businesses. For instance, Valero Energy (NYSE: VLO  ) today warned that its earnings would be lower than expected, as discounts for U.S. crude have largely disappeared. For Valero and its fellow refiners, rising oil prices raise their costs, while there's no guarantee that retail gasoline prices, which are determined by world markets, will follow suit.

What's next?
The big question on the inflationary front is whether rising energy costs will show up as price increases in other goods. If they do, then the clock might be running out on the Fed to continue its aggressively accommodative monetary policy. If inflation remains in check, though, then it could set the stage for continued Fed stimulus well into the future.

Ford and GM will need to succeed outside the U.S. if they want to participate fully in the increasingly global industry's growth. China is already the world's largest auto market -- and it's set to grow even bigger in coming years. A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market," names two global giants poised to reap big gains that could drive big rewards for investors. You can read this report right now for free -- just click here for instant access.

Read/Post Comments (1) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 14, 2013, at 10:58 PM, enginear wrote:

    Well, the economy starts upping the horsepower, and all those companies that produced record profits through the downturn by cutting costs are now looking to get margins up on genuine sales increases. Not too surprising... they get some real demand that has been missing for quite a while, and they want to revisit the good old days. Hey!, they could even hire some people.

    Maybe the few companies mentioned aren't the best examples (name a June-July when fuel prices drop), but a lot of this is just the natural state of things

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2534360, ~/Articles/ArticleHandler.aspx, 9/25/2016 3:22:38 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/23/2016 4:55 PM
^DJI $18261.45 Down -131.01 -0.71%
F $12.17 Down -0.01 -0.08%
Ford CAPS Rating: ****
GM $32.12 Down -0.27 -0.83%
General Motors CAPS Rating: ***
VLO $55.67 Up +0.07 +0.13%
Valero Energy CAPS Rating: ****