Tags: Wholesale | costs | food | prices

Future Food-Price Increases May Be Unappetizing to Consumers

Friday, 13 July 2012 11:33 AM

INDICATOR: June Producer Price Index

KEY DATA: PPI: up 0.1 percent; Excluding Food and Energy: up 0.2 percent; Foods: up 0.5 percent

IN A NUTSHELL: “Wholesale costs remain fairly tame though we have to watch out for future food price increases.”

WHAT IT MEANS: The world economy continues to soften and that is having a positive impact on the cost side of things. Overall wholesale prices did inch upward, but for most sectors there was not much pressure on the cost side.

The one major exception was food, especially meat prices which posted its highest jump in nearly a year. Capital equipment costs rose a little but there actually may be some good news in that increase: Construction equipment prices are on a tear and that may be signaling a rebound in the construction sector.

When looking at the pipeline, though, the global slowdown is creating downward pressure on materials costs at both the intermediate and crude levels, even when you exclude energy. The one potential problem is in food.

Intermediate food and feed costs jumped in June and the drought across the farm belt looks like it will lead to large increases in food costs going forward. That is not good news for consumers as these expenses get passed through fairly quickly.

MARKETS AND FED POLICY IMPLICATIONS: Except on the food side, the outlook is that business expenses will remain tame for the rest of the year. There is really little expectation that growth will accelerate sharply in any part of the world.

Europe is still cycling downward, the slowdown in China, which may be greater than the official numbers indicate, is having an impact on all those countries that supply materials to the Chinese industrial sector, and the U.S. is just hobbling along, so where could the pressure on costs come from? Those Fed members who may be worried about inflation are looking well into the future.

Reports like this, even if it was higher than expected, argue for minimal price increases for months to come and thus the Fed can stay its course. As for investors, it’s more about world growth than inflation and anything that points to stability in Europe or stimulus in China is a positive.

Any indication of growing problems causes angst. In other words, volatility will reign for a long time.

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Friday, 13 July 2012 11:33 AM
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