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Another Producer-Price Spike Threatens the Dow's Rally

Dan Caplinger
July 12, 2013

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 (INDEX: ^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