PPI in line with expectations, but core goods PPI higher than forecast. Could be signalling an end to deflation and rising inflation in 2011

Overall finished goods PPI prices were in line with expectations, rising 0.2% in July. Core finished goods PPI prices were higher than forecasts, rising 0.3% in July (partly due to a rebound in light truck prices).

BOTTOM LINE

The PPI data provide further evidence that the core disinflation may be drawing to a close. Core finished goods price inflation notched up to 1.5% over the last year and over the last three months it has run at a faster rate of 2.6%. In addition, although core intermediate and crude goods inflation has slowed, we think the magnitude of earlier gains leaves some of these prior increases yet to feed through. As for the headline PPI, we think the large surge in grains prices will push food prices up over the next six months (the increase in food prices in July did not appear to be related to grain prices). Inflation is not the focus of traders at this moment, but we think investors should keep a weather eye on inflation trends over the next year. Gold is within $25 an ounce of its previous high and, in our view, is signaling that inflation will be a problem in 2011.

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