Today the Bureau of Labor Statistics of the U.S. Department of Labor released its April report on the Producer Price Indexes for Finished Goods, Intermediate Goods, and Crude Goods.

The Finished Goods PPI is the most widely followed of the three. It measures the selling price of goods when they are first ready for sale to the ultimate consumer. The PPI provides comprehensive coverage of prices for all the major goods producing sectors, including: manufacturing, mining, agriculture, forestry, fishing, and natural gas and electrical power production.

Changes in the PPI provide an indication of the rate of inflation (price increases) at the time the goods go out the factory door. The Consumer Price Index (CPI), due to be released next Tuesday, measures inflation later, after purchases by the public are rung up at the retail cash register. So, all other things being equal, the PPI should give an earlier warning of inflation than the CPI.

Bond market participants watch both of these indexes with great interest, along with any other information that might give clues about inflation. Rising inflation breeds higher interest rates and lower bond prices. Stock investors closely monitor what's happening to bond yields because historically the stock market has performed well in an environment of falling interest rates.

Today's report showed that the finished goods PPI rose 0.4 percent between March and April. Taken by itself, this number implies an annualized 4.8 percent rate of inflation at the producer level. But, the raw monthly number is not a good indication of what is happening. The energy and food price components vary widely from month to month, so it is more meaningful to look at the behavior of the PPI with the energy and food contributions excluded. For April, this so-called core rate of inflation only rose by 0.1 percent. In the past five months the core PPI rose by 0.1 percent on four occasions and fell by 0.1 percent once.

Another approach is to examine the change in the PPI over a longer period, say a year. When we do this, the month-to-month food and energy variations tend to average out. For the twelve-month period ending in April, the finished goods PPI rose by only 2.5 percent. The average value of the annual change during the last 5 months was 2.3 percent. The annual change during 1995 was also 2.3 percent.

It appears that market participants took a look at today's PPI number, along with other recent economic reports, and decided (at least for today) that moderate economic growth and modest price growth could coexist. At the end of the day, the 30-Year T-Bond yield had been driven down from 7.02 percent to 6.93 percent. In the stock market, the Dow Jones Industrial Average triggered program trading curbs 15 minutes after the opening, and held on for a gain of 43 points for the day.

Byline: Lafferty (MF Merlin)