PPI rises 0.2% in July
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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.

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Posted on Wednesday, August 17, 2011 @ 9:53 AM

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