KEY DATA:  PPI: +0.7%; Over-Year: +8.3%; Goods: 1%; Goods Ex-Food and Energy: +0.6%; Food: +2.9%; Services: +0.7%

IN A NUTSHELL: “Still no relief from the never-ending rise in producer costs.”

WHAT IT MEANS:  I am sure that Fed Chair Powell truly believes that the inflation pressures we are seeing are only transitory, but as of August, wholesale costs were still soaring.  Both goods and services expenses jumped, and it wasn’t due to energy, which was up moderately (at least for energy).  Indeed, the increases were across all industries.  There are over fifty special categories of the PPI that slice and dice the data in every way possible.  Every single one of them posted an increase.  Even more distressing was the year-over-year numbers: Only one special group rose less than four percent.  For consumers, the food numbers don’t look good.  They were up sharply in August and have risen nearly thirteen percent since August 2020.  While the pathway from producer costs to consumer prices is not direct and frequently ends in a dead end, when it comes to food, those usually wind up being passed through.  As for services prices, they are rising significantly as well, but not quite as massively as goods costs.  That, of course, is faint praise. 

IMPLICATIONS: The next FOMC meeting is on September 21, 22 and I truly wish I was a fly on the wall.  You have the Fed Chair who wants to go slow when it comes to tapering asset purchases.  There is also the “weak” August employment report, that I think has been totally misread.  It really wasn’t weak, but the Committee will not have the September report before they meet, so they only have what has already been released.  On the other side are a number of Reserve Bank presidents who feel inflation is a growing issue and the economy has recovered enough that continued massive additions of liquidity could create more inflation problems.  They want to at least announce the Fed’s intention to taper.  So, what will the Fed do?  The members will probably find wording that says they are watching the economy and inflation carefully and at the suitable time, will announce that that the need for aggressive actions will be coming to an end.  In other words, they will say close to nothing.  And that makes sense.  The economy doesn’t need as much stimulus as the Fed is putting into the system, but timing matters and the “weak” employment report is the 800-pound gorilla in the Eccles Boardroom.  As for investors, they need to chill. The economy is just fine, though growth is moderating because most of the reopening process has been completed and too many people refuse to get vaccinated, so the virus resurgence is affecting confidence and restraining activity in a number of industries.  That is correctable without a sharp slowdown occurring. And inflation, even if it persists at an above 2% pace, may not be that bad.  There is nothing magical about 2% inflation.  For many businesses, it locks them into sub-2% price increases and places major pressures on controlling operating costs, which sometimes is out of their control. The equity markets have risen massively, and it would not be a surprise if there was pull-back, especially if more normal growth has yet to be priced into the markets.  But the economy shows no signs of faltering, and that too should be a factor in investor decision making.