Upstream Inflation Hits A 26-Year High In The US

[DailyFx]

The market showed little interest in data that confirmed a high level of soaring upstream inflation; but this data can certainly be interpreted for clues to the future of Fed policy decisions. According to the Bureau of Labor Statistics, the headline producer price index surged 1.2 percent - double what was expected. For the core figure, which excludes energy and food prices, a 0.7 percent jump catches economists off guard with a jump that was more than three times the growth expected. Such a jump is not unheard of given the recent volatility in a number of key components in the price basket, but the effect on the annualized numbers is nonetheless encouraging for rate watchers. Following the 17-year high in the front-line CPI number reported last week, this upstream inflation gauge revealed year-over-year growth in prices measured 9.8 percent - the most oppressive reading since June of 1981. However, such a lofty reading seems to have been downplayed in the market as many participants and commentators suggest the pull back in the energy complex through August, and the steady cooling in food costs, means prices will have topped through July. This forecast would be ignoring an important facet of the data - the highest reading of annualized core inflation since May of 1991. The second round inflation effects are clear as producers and business owners look to recoup costs in production and transportation already incurred. Therefore, even if energy prices tapper from here, core inflation would likely continue to increase for at least a few months. This will be an important point to watch in Fed discussions going forward as upside inflation risks have largely focused on the gasoline and crude prices. – John Kicklighter, Currency Strategist for DailyFX.com