Did Inflation Fears Sink the Dow Today?

On Friday, the Dow Jones Industrials (DJINDICES: ^DJI  ) added to their severe losses from yesterday, falling 143 points and giving investors pause in considering whether the five-year-old bull market could finally be coming to an end. Yet, even though the Bureau of Labor Statistics reported that the Producer Price Index rose a much higher than expected 0.5% in March, few investors believe that inflation will become a worry in the near future, and Dow stocks General Electric (NYSE: GE  ) and Caterpillar (NYSE: CAT  ) -- both of which have customers who rely on a healthy wholesale market for goods at various stages of production -- certainly didn't appear to benefit from today's reading on the PPI.

What you should know about the PPI
Taken out of context, March's 0.5% rise in the Producer Price Index seems troubling, as it's the index's biggest jump since last June. But even with that jump, the overall annual change in the PPI was just 1.4%, below the Fed's implicit 2% inflation target. All of the gain in final-demand prices was attributable to services, with final-demand goods remaining unchanged as a spike in food costs was balanced by a sharp decline in energy. In particular, rising prices for pork, deli meats, and milk offset declines in gasoline, diesel, and liquefied petroleum gas prices.

Source: Gerald R. Ford Presidential Library.

Bolstering the case for lower inflation were prices at early stages of production, with prices of processed and unprocessed goods for intermediate demand both falling on the month. Of particular concern to Dow component Caterpillar was the drop in prices for copper base scrap and carbon steel scrap, as weakness in those materials points to reduced demand for mined goods, as well as possibly lower construction and infrastructure-building activity, especially in key growth areas of the world. General Electric has also made forays into various aspects of the materials sector, although it, in many ways, stands to benefit much more than Caterpillar because General Electric also requires substantial raw materials to build its higher-end industrial products.

One thing that investors in the Dow Jones Industrials need to remember is that the Producer Price Index has recently incorporated a new methodology that includes not only prices of goods, but also services prices. Because of that, economists have had to get used to a new metric, and that might explain why they had expected only a 0.1% increase for the PPI.

In any event, the March Producer Price Index number sets the stage for an interesting piece of data next week, when the BLS will be back with its numbers on the Consumer Price Index from March. With most Federal Reserve officials more worried about deflation rather than inflation, though, it's unlikely that even a somewhat high number will faze policymakers. And even though General Electric, Caterpillar, and other stocks outside the Dow Jones Industrials might prefer higher commodities prices, even March's increase doesn't look likely to become a long-term trend.

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