Producer Prices Surge in Possible Inflation Warning

A larger-than-expected rise in wholesale prices was reported on Tuesday by the Labor Department, sending the stock market into a sell-off on worries of surging inflation.

The U.S. Labor Department said that the Producer Price Index – a measure of prices producers pay for component goods and services – rose 0.6 percent in July. Economists had been expecting an increase of 0.3 percent. The surge in the PPI was blamed on a 2.5 percent increase in energy costs in July.

There was better news on the core reading, however. The core PPI, which excludes highly volatile food and energy prices, rose only 0.1 percent in the month, in-line with economists’ expectations.

Producer prices are now up 4 percent in the past year, while core prices are up 2.3 percent, the biggest gain in nearly two years. But the Fed pays closer attention to the consumer price index for a gauge on inflation. Those numbers will be released Wednesday.

“Rising energy and food costs remain a threat to the inflation outlook,” wrote Sal Guatieri, an economist with BMO Nesbitt Burns, in an analysis note. “However, manufacturers are doing a good job of absorbing the increases, limiting the pass-through to the consumer.”

Wall Street took the PPI news poorly on Tuesday. In midday trading, the Dow Jones Industrial Average was down more than 160 points to 13,070.

The Dow has lost nearly 1,000 points since reaching an all-time high closing of 14,000.41 on July 19 of this year.