Core PPI Inflation Rises in June

June producer prices showed a substantial decline in headline inflation as energy price rises retreated, but core inflation rose more than expected. Pipeline pressures abated at the crude and intermediate levels.

Headline PPI fell -.2% MoM (consensus +.2%) versus an increase of +.9% MoM in May. This is the first negative monthly change since January. On an annual basis, headline inflation fell to +3.3% YoY in June versus +4.1% YoY in May. Over the past three months, headline PPI has risen at a 5.7% annualized basis.

Core inflation rose +.3% MoM (consensus +.2%), and the highest monthly gain since March. Over the past year, core inflation rose 1.8% versus June 2006 (consensus +1.7% YoY), a notable increase from the +1.6% YoY rate in May. Ex-food and energy, core PPI has risen at a 2% annualized basis over the past three months.

Gasoline prices fell -3.9% MoM and food prices fell -.8% MoM. Though the prices for gasoline and food fell this month, they have been trending higher over the past year, with gasoline rising +3.8% YoY and food rising +6.5% YoY. Energy prices overall fell -1.1% MoM but are up +4.7% YoY. This month's decline in food and energy prices is not likely to persist into next month's data.

Consumer goods prices fell -.4% MoM while capital equipment rose +.3% MoM, the biggest gain since February. Computers continue to fall in price, declining -3.4% MoM, and -22.5% YoY. Surprising strength was observed in auto prices which rose +1.4% MoM, and accounts for 17% of the core weighting. This is unlikely to continue based on the weak auto sales data, and should allow core PPI to subside in coming months.

Intermediate goods prices slowed to +.5% MoM from +1.1% MoM in May, and crude goods prices decelerated even more to +.3% MoM from +2% MoM in May. Food prices took over from energy prices as the major inflationary factor in intermediate prices, while they were about equally weighted in their impact at the crude level in June.

Over the first six months of 2007, finished goods prices have risen at a 6.4% seasonally adjusted annual rate. This compares with an unchanged reading during the last six months of 2006. The main reason for the change is energy prices which rose 18.4% this year, after declining 8.2% in the second half of 2006. Food prices accelerated in 2007, rising at a 7.8% for the year-to-date, after increasing 4.9% annualized in the second half of 2006. Excluding food and energy, the core PPI accelerated to 2.3% so far this year versus +1.3% annualized in the prior six months.

The Treasury market focused on the rise in core inflation, and has sold off slightly this morning, causing ten year yields to rise around 2bp.