On Thursday morning, the Dow Jones Industrial Average (DJINDICES:^DJI) overcame early losses and managed to reach breakeven by 10:30 a.m. EDT. For the most part, investors seemed content to take a breather from yesterday's record-setting close for the Dow as earnings season continues to go well.
One of the more surprising things about the stock market's ascent lately is that it has come amid rising concerns about inflationary pressures in the financial system as market participants try to guess how Fed policymakers will incorporate new price data into their timing of future policy changes. Even though the Producer Price Index rose a troubling 0.4% yesterday, Dow investors continued their policy of ignoring the potential impact of inflation, and shares of Dow energy stocks Chevron (NYSE:CVX) and ExxonMobil (NYSE:XOM) even seemed to celebrate some of the price increases cited in the June PPI report.
What the PPI said
June's Producer Price Index headlines would ordinarily have raised some concerns among Dow investors about whether price pressures were starting to feel the impact of years of stimulative monetary policy. The overall 0.4% increase was weighted slightly toward goods over services, with prices of final-demand goods rising at a slightly faster pace than services prices. Further down the supply chain, intermediate-demand processed goods prices also rose 0.4%, and services prices climbed 0.6%. Remember, these are monthly figures, so annualized, they would imply increases well in advance of the Fed's inflation target.
Yet when you look at the numbers more deeply, you can see the impact that a single sector had on the overall numbers: energy. In the final-demand numbers, energy prices skyrocketed 2.1%, with a 6.4% increase in gasoline prices accounting for a huge portion of the overall rise. That likely played a role in supporting shares of Chevron and ExxonMobil yesterday, as their downstream units benefit from higher prices for refined products. By contrast, prices of food actually fell during the month, as grain prices plunged by double-digit percentages and prices of raw milk and other food products contributed to the overall decline. When you strip out those volatile food and energy components, the core PPI's tiny rise continued a long string of modest results that don't suggest much inflationary pressure.
Moreover, looking at the results over the past year, overall growth rates don't seem nearly as troubling. Final demand prices have risen 1.9% in the past 12 months, just about hitting the Fed's target rate. Energy prices have climbed at a slightly higher rate, helping Exxon and Chevron, but even that gain hasn't been enough to worry policymakers.
Why Dow investors don't seem worried
From an even longer-term perspective, there's an increasingly compelling theory for why inflation-data releases don't seem to move the markets anymore. It's now been almost 35 years since the last major inflationary spiral in the U.S., and a growing number of investors have never had to deal with the impacts of inflation. For a whole generation of investors, inflation is something that happens in developing parts of the world with far less stable currency and financial markets than the U.S. has. In part, you can see that belief in the yields that bond investors are willing to accept for long-term debt, as those rates carry almost no margin for a spike in inflation at all.
Of course, the perfect time for problems to arise is when everyone has all but dismissed them as a possibility. Certainly, Fed policymakers look at inflation data, and if a lasting increase in prices were to take hold -- especially on the wage front -- then the Fed might shift away from its accommodative stance on interest rates.
For now, though, spurring economic growth is more important to the economy than focusing on the future potential of accelerating inflation. As long as the Fed and others make growth the priority, single-month inflation numbers aren't likely to make the Dow move sharply.