KEY DATA: PPI: +0.5%; Over-Year: 3.1%; Ex-Food and Energy: +0.3%; Goods: 1%; Services: +0.3%

IN A NUTSHELL: “Energy matters and right now the surge in prices is driving up businesses costs and making the Fed’s decision to raise rates, if that happens, easy.”

WHAT IT MEANS: As the Fed finishes its meeting and decides what to do with interest rates, the data on inflation makes it clear that its target rate has largely been reached. Yesterday’s Consumer Price Index showed that inflation is rising and today’s Producer Price Index reinforced that view. Wholesale costs jumped in May led by a surge in energy prices. That should ease in the June report, but businesses are still paying a lot more this year for energy than they did last year. Even excluding energy, producer prices were up solidly. Indeed, if you look at the detailed chart of price changes by industry, there were few areas where prices actually fell. And the major reason that wholesale costs didn’t jump even more was that food prices were up minimally. Fish and shellfish prices were down sharply, though I haven’t seen that in the markets I frequent, and I eat fish all the time. As for my beloved bakery products, their prices rose moderately, though they were up more at the consumer level. Oh, well. There isn’t a great schism between goods and services inflation, at least when you remove energy. That indicates the inflationary pressures have become widespread. Looking into the future, there are similar warning signs as intermediate costs were up solidly, especially for processed products.

MARKETS AND FED POLICY IMPLICATIONS: The Federal Reserve likes to look at prices that exclude volatile components such as energy and food. The resulting index is called the “core” and that is the case whether they look at wholesale or consumer prices. It does that, in part, because large movements in food or energy can overstate the trend in inflation. That was the case in May. At the consumer level, the core is a better indicator of future inflation than the overall index. But the reality is that businesses and consumers pay food and energy costs and if you look at price changes over the year, you get a good picture of what is happening. In the business sector, costs are rising sharply, which I would expect the FOMC will take seriously as they make not only their decision on whether to raise rates now but over the next year or two. Expect the Fed to announce a rate hike later today. Whether the members will signal they are concerned about inflation is the real issue and that might be made clearer in either the statement, Chair Powell’s press conference or the charts on inflation, growth and interest rates. We will know soon enough.