Producer prices (PPI) increased a modest 0.1% M/M in June following a steep 1% M/M drop in May. On a yearly basis PPI stabilized at 0.7%. The market was however looking for a steep 0.4% M/M decline and most observers even expected a still bigger decline, following the publication on Thursday of plunging import prices, which have usually a strong correlation with headline PPI. The surprise was though in the much smaller than anticipated decline of gasoline prices. Also food prices surprised on the upside, up 0.5% M/M following a 0.6% M/M decline in May, due to meat prices (higher corn prices due to the drought).
Core PPI rose a trend-like 0.2% M/M and was up 2.6%Y/Y, slightly off the 2.7% Y/Y registered in May. So, mostly special factors affected PPI. While the expected strong decline in headline PPI didn’t materialize, the report shouldn’t raise overall inflation concerns. Intermediate and crude goods PPI, indications of PPI prices in early stage of production, fell be 0.5% M/M and 3.6% M/M to be down respectively 1.3% and 11.4% Y/Y.
Michigan consumer sentiment deteriorated unexpectedly in July. The headline index dropped to 72 in early July from 73.2 in June, while the market expected a marginal increase. It was the second consecutive monthly drop which is disappointing. The decline was driven by the more forward looking expectations index that fell 3 points to 64.8, while the current condition index improved modestly to 83.2 from 81.5. Inflation expectations were little changed. The weak labour market conditions and fears about the euro crisis may have had a bigger effect than the lower gasoline prices and the improving housing market. While the link between confidence and spending is not so tight in a short term perspective, consumer sentiment should improve to give consumer spending more solid fundamentals.