Truck Price Pressure Drives Core PPI Lower

Today’s data release got the party rolling:  Core PPI (excluding food and energy) fell 0.3%, the first such drop since October ’05. Stocks rallied, as did Bond prices, driving yields down 75 bps across the curve.

A closer look reveals how this happened:  Vehicle prices fell 2%, with Car prices down 0.8%. But the real action was in dropping Light Truck prices: Given Q2 surge in Oil and gasoline, its no surprise that light truck prices fell 3.1%. I expect to see this metric to be under continued pressure for the foreseeable future.

The drop in Car and Truck prices accounts for nearly the entire decline in the core PPI.

Prices for oil and other materials continue to
rise; WSJ noted that "Deeper in the production pipeline, prices increased. Prices of raw materials,  also known as crude goods, rose by 3.1% in July after declining 1.7% in June.
Intermediate goods prices increased 0.5% after climbing 0.7% in June."

Prices of metals and chemicals continued to rise. These price increases include a 4.8% rise in
energy materials, and a 1.3% gain in prices of
industrial materials.

And, as we learned last week, productivity growth is slowing.

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The bottom line is that this is a far less benign number than would appear at first blush.

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UPDATE: August 15, 2006 12:47pm

Mike Darda points to these Bloomberg charts:

Ppi_crude

No inflation to see here, move along . . .

UPDATE 2: August 15, 2006 3:37pm

The great irony here is that because GM can’t move their trucks due to their lousy fuel economy,  they have to offer big discounts — i.e, rebate/mark them down.

The sale prices of poor selling trucks makes it appear that there is no inflation, when what we actually have is everyone thinking inflation is going away — so naturally the markets rally.

Hence, by being unable to sell their 10MPG trucks, GM’s stock price actually rises!

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Sources:
Producer Price Indexes
BLS, July 2006
http://www.bls.gov/news.release/pdf/ppi.pdf

Core Wholesale Prices Decline, Suggesting Inflation Is Easing
BENTON IVES-HALPERIN
WSJ, August 15, 2006 9:34 a.m.
http://online.wsj.com/article/SB115564422383336075.html

Core wholesale prices fall 0.3% in July; Core intermediate PPI up 7.9% in past year
Rex Nutting
MarketWatch, 10:21 AM ET Aug 15, 2006
http://tinyurl.com/o9kjr

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