KEY DATA: PPI: 0%; Less Food and Energy: +0.3%; Goods: -0.6%; Energy: -3.3%; Services: 0.4%

IN A NUTSHELL: “While wholesale goods costs continue to go nowhere, pressures on services expenses are building.”

WHAT IT MEANS: The key concern for the economy is not growth but prices and today’s Producer Price Index numbers didn’t do much to clarify the situation. Wholesale costs were flat in August as a sharp rise in services expenses was offset by an even larger decline in goods prices. Most people focus only on the goods component, but services make up two-thirds of the index, so we really do need to keep them in mind. On the goods side, energy declines continue to lead the way. In contrast, food prices rose sharply. Goods costs excluding food and energy were off a touch as were capital goods prices. Where there are rising prices was in the services sector, especially trade. Transportation and warehousing is benefitting from the declining energy costs and their prices are down. Real price pressures are developing in the goods and services components closest to the consumer: finished and personal consumption goods and services. Over the past few months there has been a clear acceleration in prices in most of those areas. Looking into the future, there are no goods price pressures in the pipeline.

The University of Michigan’s mid-month reading of consumer sentiment came in well below expectations. Households seem to be bummed by the craziness in the stock markets. But let’s keep in mind that swings created by equity market volatility don’t necessarily translate into changes in consumption as people have learned not to spend their gains.

MARKETS AND FED POLICY IMPLICATIONS: Inflation is clearly not an issue, except for the simple fact it is actually too low. Producer costs should not cause consumer goods prices to rise much, though there could be some issues on the services side. But services don’t get the same press as goods so the focus of attention is on food and energy and not much else. Still, there is little reason to expect that the Fed’s target of 2% for inflation will be reached soon, even if you exclude food and energy. Will it be met in the medium term? Probably, but it will have to come from increasing prices pressures in services and for some domestically produced goods. With the dollar strong, import prices will remain soft, so don’t look for any help there. It is doubtful that anybody’s thinking has been changed by today’s data, so have a great weekend.