Implications: The Federal Reserve is in a bind. The overall producer price index rose a moderate 0.2% in July (7.2% year-over-year), but the "core" PPI, which excludes food and energy, increased 0.4% (2.5% YOY). At 2.5%, the 12-month increase in "core" producer prices may seem small to many, but these prices are up at a 3.9% annual rate in the past three months – a worrisome increase. Given that the Fed has used low core price inflation to justify QE2 and 0% interest rates, the acceleration in these prices during recent months creates a serious dilemma. At the least, it would seem to make a third round of quantitative easing very, very difficult, if not impossible, to justify. This is especially true because further up the production pipeline, inflation is even worse. "Core" intermediate prices – components and parts in the production pipeline – rose 0.2% in July and are up 7.8% versus a year ago. "Core" crude prices – the raw materials of production – are up 27% in the past year. As a result, it is hard to see producer or consumer prices moderating anytime soon. Inflation is a clear and present danger and the Fed is behind the curve.
Click here to view the entire report.