Prices At Producer, Consumer Levels Jumped In July

In the last two days, the U.S. Government has issued reports showing a sharper than expected rise in inflation at both the producer and consumer levels, suggesting even higher prices could be ahead.

On Wednesday the Labor Department reported the Producer Price Index – a measure of costs at the producer, or wholesale level, rose 0.2 percent in July. However, when food and energy costs are removed from the equation, prices rose twice as fast – 0.4 perecent.

Today, the Labor Department reported its Consumer Price Index jumped 0.5 percent in July, led by rising gasoline prices at the pump. However, when the volatile food and energy components are removed, prices rose at a more stable 0.2 percent.

Still, following June's reports, in which both producer and consumer prices actually went down, these July reports are coming under close scrutiny. Economist Joel Naroff, of Naroff Economic Advisors, in Holland, Pa., says prices are rising at the producer level faster than it might seem.

Wholesale prices rising quickly

“The Producer Price Index rose moderately in July, but that was largely due to a drop in oil and gas related products,” Naroff said. “When you strip out those products, wholesale costs increased sharply. Food prices jumped and those costs are likely to be passed through fairly quickly to the consumer.”

And as we have seen, there seems to be as much rhyme and reason to the oil market as there has been to the stock market lately. Oil prices are significantly off their highs of the year, mainly because of the debt problems plaguing Europe.

“Looking out to the future, intermediate prices were up, especially when you exclude energy and crude prices excluding food and energy also rose,” Naroff said. “That points to continued pressures on non-food, non-energy commodities, which is not good news for future production costs.”

Naroff says the Federal Reserve has been betting for months that deflation, not inflation, is a bigger threat to the economy. That's why he's kept interest rates so low.

“Right now, that bet looks a bit iffy,” Naroff said.