The September overall producer price index (PPI) rose 0.3%, while the core aggregate (which excludes food and energy) was unchanged. The headline figure was stronger than expected, and was led by a 1.2% surge in food prices that followed August's 0.7% gain. Accounting for much of the gain was a 21% jump in vegetable prices.
The energy aggregate revealed a modest 0.1% gain, led by a 2.2% rise in gasoline prices. Core consumer goods rose 0.1% for the third straight month, while capital equipment prices fell 0.1%. Component figures were mixed.
Overall, while the September data left the overall-PPI rising at a 3.5% rate on the year, the core aggregate has increased just 0.1% year-over-year. This continues to leave the series at one of the most favorable readings in history (back to 1973). Such data support the view that the Fed will not be in a hurry to raise rates any time soon, even despite robust growth in the second-half of the year.
Nonetheless, the weakness in the dollar this year has already begun to affect the trade price indexes. And given that dollar weakness continues, we at MMS International could see some upward pressure build in various inflation measures over the next year. This, along with trends in growth and employment, will dictate when the Fed will reconsider commencing the tightening cycle.
Trade Deficit Falls
The goods and services trade deficit posted a surprising drop to $39.2 billion in August from a downwardly-revised, and also low, $40 billion gap in July, which itself was a repeat of the same small gap in June.
This extended pattern of narrowing deficits would be an unambiguous good sign were it not for huge declines in both imports and exports of goods within the report of 3.0% and 4.3%, respectively, which suggests some kind of distortion to the August data. MMS International's guess is that the blackout in August had a bigger impact than expected, given that the ISM trade indexes suggested a solid level for both imports and exports on the month, and the rapid growth in U.S. aggregate demand would imply a much stronger trade performance.
The weakness in goods trade was evident in nearly every one of the six major goods components for both imports and exports, though weakness was disproportionately seen in the capital goods and autos components. If economists do not assume a bounceback in the deficit in September, following this five-month downtrend from the $43 billion March peak, and there are no mitigating assumptions made for domestic inventories, third-quarter GDP appears poised for a gain of as much as 6.5% to 7% for the quarter.
From MMS International