Inflation Surges in June

July 22,2008--The Producer Price Index and the Consumer Price Index both increased significantly last month, and may cause the Fed to take anti-inflationary measures. Industrial production and retail sales picked up in June. In a rare spot of good news for the beleaguered housing market, new residential construction posted a gain.

 

Producer Price Index
Producer prices for finished goods surged 1.8% in June, after rising 1.4% in May. Again, a large increase in food and energy prices fueled higher prices for producers.  Inflation appeared at all levels of production, including core intermediate goods, often viewed as leading indicators of consumer inflation. In June, materials used for durable and nondurable goods rose 1.7% and 2.7%, respectively. Moreover, core prices, which exclude food and energy prices, increased 0.2% for the month.

 

Consumer Price Index
The consumer price index (CPI) rose 1.1% for the month in June, after increasing 0.6% in May. As expected, the largest single increase was in energy prices, as they surged 6.6% in June. The core CPI, which excludes food and energy prices, inched up 0.3% for the month. On a year-ago basis, the top-line CPI has increased 5.0% while the core CPI is up 2.4%.  Inflationary concerns may lead the Fed to take corrective action shortly, though, given the weak economy at the moment, raising interest rates may hamper a recovery. 

 

Industrial Production
Industrial production increased 0.5% in June. Previously, in May, Industrial Production declined 0.2%. Utility output led the increase, as it surged 2.1% during June. Both mining and manufacturing also rose, at a rate of 1.1% and 0.2%, respectively. Capacity utilization inched upward and now stands at 79.9%. With continued weakness in residential investment, auto production, and the broader economy expect industrial production to remain weak this quarter.

 

Retail Sales
In June, total retail sales rose 0.1%, after a downwardly revised gain of 0.8% in May (originally reported as a 1.0% gain). Sales at gasoline stations (4.6%), nonstore retailers (0.8%), and food and beverage stores (0.7%) fueled the overall growth in June’s retail sales. However, sluggish sales at motor vehicle and parts dealers (-3.3%) and furniture & home furnishing stores (-1.4%) hindered growth significantly. Core sales, which exclude sales made at gasoline stations and auto dealerships also posted a 0.8% increase. On a year-to-year basis, top-line retail sales increased 3.0%, while core sales are up 3.6% for the year. The trend for weak or negative growth should remain in the near term, even as consumers spend their stimulus checks, as higher food and energy costs, a weak labor market, the housing crisis, and the credit crunch continue to discourage spending.

 

New Residential Construction
Housing starts increased 9.1% in June to 1.066 million units, following a decrease of 2.7% in May. Permits for new housing also rose, up by 11.6% during June. Compared to June of 2007, housing starts are down 26.9%. The housing market remains soft, even with lower mortgage rates, as the ongoing credit crisis continues to deter potential buyers.