Producer Price Inflation Falls Dramatically in August, But Core Holds Steady

Total producer prices fell much more than expected in August, declining -1.4% MoM (consensus -.3%) and falling to +2.2% YoY (consensus +3.2%), and down substantially from the +4% YoY change in July. This was the largest monthly decline in headline inflation in almost a year. On the other hand, core inflation, which excludes food and energy costs, grew +.2% MoM (consensus +.1%) and only declined modestly, and as expected, to +2.2% YoY from +2.3% YoY in July. Today's data moves headline inflation down to equal the gain in core PPI inflation over the past year.

The large decline in headline inflation was due to a -14% drop in wholesale gasoline prices. The larger energy category saw prices decline -6.6% MoM (unchanged YoY), which was the largest monthly decline in over 4 years, as all major categories fell. Energy accounts for 19% of the weighting in the PPI. Unfortunately, the record oil prices reached this week indicate the August decline in energy costs is going to be unwound in the September figures. So, the low inflation rates of this month may prove to be an aberration unless the economy falters.

Consumer goods costs fell -1.8% MoM as food prices fell -.2% MoM (+4.7% YoY). Capital goods prices rose +.1% MoM, and accounts for 24% of the weighting in PPI. Gains in aircraft (+.9% MoM) exactly offset declines in light motor truck (-.9% MoM) showing the benefits of a strong export market for aircraft, and softening demand for energy hogging trucks and SUVs in the US. Passenger car prices rose +.5% MoM and prescriptions rose +1.3% MoM helping to push up core PPI.

Intermediate and crude producer prices also fell in August. Intermediate goods costs fell -1.2% MoM and are now up only +2.4% YoY. Crude intermediate costs have also risen +2.4% YoY, but fell -.5% MoM. Crude goods prices for raw materials dropped 3%.