The Producer Price Index was Unchanged in August
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Implications: Inflation is still in a long-term rising trend, but that process is going to be gradual, with many stops and starts along the way. Booming energy production is a key reason why headline inflation hasn't moved up more quickly. Producer energy prices fell 1.5% in August and are up only 0.2% from a year ago, a testament to fracking and horizontal drilling. Largely as a result, producer prices were unchanged in August and are up a modest 1.8% from a year ago. Still, through the first eight months of 2014, producer prices are up at a 2% annual rate, well above the 1.1% rate over the same period in 2013. The Federal Reserve should take note that rising inflation is more apparent in the services sector, where prices are up at a 2.6% annual rate in the past three months versus a 1.9% gain in the past year. Prices further back in the production pipeline (intermediate demand) do not yet confirm a continued acceleration in inflation. Prices for intermediate processed goods are up at a 1% annual rate in the past three months, slightly below the 1.2% gain over the past year. Prices for unprocessed goods saw a sharp 3.3% decline in August and are down at a 24.7% annual rate in the past three months. But intermediate demand prices are highly volatile and we expect prices to move higher over the coming months. Taken as a whole, the trend in producer price inflation continues to hover around 2%, suggesting the Fed should continue on the path of ending quantitative easing by the end of October. The problems that ail the economy are fiscal and regulatory in nature; continuing to add more excess reserves to the banking system is not going to boost economic growth. Loose monetary policy will eventually gain traction.

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Posted on Tuesday, September 16, 2014 @ 10:47 AM

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.